Dear International Strategic Management Executives: . Please read from our attached ?Textbook 1 Case 26: PROCTER & GAMBLE, the following Strategic Management c

Dear International Strategic Management Executives: . Please read from our attached ?Textbook 1 Case 26: PROCTER & GAMBLE, the following Strategic Management c

.

Please read from our attached  Textbook 1 Case 26: PROCTER & GAMBLE, the following Strategic Management case assigned for this Learning Module and please analyze and answer the following questions:

Answer Question 1-4

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1. * What’s this Strategic Management Business Case about? I.E Executive Summary 

 Executive Summaries are much like any other summary in that their main goal is to provide a condensed version of the content of a longer report. The executive summary is usually no longer than 10% of the original document. It can be anywhere from 1-10 pages long, depending on the report’s length. Executive summaries are written literally for an executive who most likely DOES NOT have the time to read the original [document].Executive summaries make a recommendation. Accuracy is essential because decisions will be made based on your summary by people who have not read the original.

 2. * Detailed Financial Analysis  refer to attached  pdf Financial Ratio Tutorial 

  Please explain, analyze, and discuss in great detail your Financial Analysis section …  

3. * Industry Analysis (PESTEL Analysis and Porter 5 Forces)

        At LEAST 3 to 5 Bullet Points for EACH PESTEL section and Porter Forces

        Please explain why? and analyze, and discuss in great detail EACH Bullet Point …

Refer to attached Porter Five Forces Chpt 003 ppt.  and The Five Forces pdf

 

4. * Business SWOT Analysis

        At LEAST 3 to 5 Bullet Points for EACH SWOT Analysis Section

        Please explain why? and analyze, and discuss in great detail EACH Bullet Point  …

Refer to attached SWOT Analysis pdf example.

Due Sat June 11 @ 11:00pm 

CASE 26

PROCTER & GAMBLE*

On February 14, 2017, The Wall Street Journal reported that Trian Fund Management, one of the biggest activist investors has built up a more than $3 billion stake in Procter & Gamble, a leading global consumer products firm. The move added urgency to P&G’s efforts to turn around its business and boost its stock price. The firm’s closely watched organic sales growth, which excludes acquisitions or divestments as well as currency swings, has been stuck between 1% and 3% in recent years (see Exhibits 1 and 2). It has struggled to boost sales growth as it has confronted a sluggish global economy and competition from global competitors and Internet upstarts.

Since its founding 175 years ago, P&G had risen to the status of an American icon with well-known consumer products such as Pampers, Tide, Downy and Crest (see Exhibit 3). In fact, the firm has long been admired for its superior products, its marketing brilliance, and the intense loyalty of its employees who have respectfully come to be known as Proctoids. But a downward spiral in the 1990’s led the firm to turn to Alan G. Lafley to try and turn things around. He spent $70 billion over his tenure scooping up brands such as Gillette razors, Clairol cosmetics and Iams pet food. With 25 brands that generated more than $1 billion in sales, P&G became the largest consumer products company in the world.

Under Lafley’s chosen successor, Bob McDonald, however, P&G’s growth stalled as recession-battered consumers abandoned the firm’s premium-priced products for cheaper alternatives. More significantly, the firm’s vaunted innovation machine stalled with no major product success during his tenure. P&G’s decline eroded morale among employees, with many managers taking early retirement or bolting to competitors. Says Ed Artzt, who was CEO from 1990 to 1995: “The most unfortunate aspect of this whole thing is the brain drain. The loss of good people is almost irreparable when you depend on promotion from within to continue building the company.”1

EXHIBIT 1 Income Statement (in millions of $)

Year Ending

June 30, 2017

June 30, 2016

June 30, 2015

Total Revenue

65,058

65,299

70,749

Operating Income

13,955

13,441

11,049

EBIT

13,257

13,369

11,012

Net Income

15,411

10,604

7,144

Source: P&G.

EXHIBIT 2 Balance Sheet (in millions of $)

Year Ending

June 30,2017

June 30, 2016

June 30 2015

Current Assets

26,496

33,782

29,646

Total Assets

120,406

127,136

129,495

Current Liabilities

30,210

30,770

29,790

Total Liabilities

64,628

69,153

66,445

Stockholder Equity

55,778

57,983

63,050

EXHIBIT 3 Significant Innovations

· Tide was the first heavy-duty laundry detergent

· Crest was the first fluoride toothpaste clinically proven to prevent tooth decay

· Downy was the first ultra-concentrated rinse-add fabric softener

· Pert Plus was the first 2-in-1 shampoo and conditioner

· Head & Shoulders was the first pleasant-to-use shampoo effective against dandruff

· Pampers was the first affordable, mass-marketed disposable diaper

· Bounty was the first three-dimensional paper towel

· Always was the first feminine protection pad with an innovative, dry-weave topsheet

· Febreze was the first fabric and air care product that actually remove odors from fabrics and the air

· Crest White Strips was the first patented in-home teeth whitening technology

Source: P&G.

Pressure from the board forced Lafley to back come out of retirement in May 2013 to make another attempt to pull P&G out of its doldrums. Soon after he took back the helm of the firm, Lafley announced that he would get rid of more than half of its brands. Over the next three years, the firm sold off many of the brands that it had acquired, capped by the $11.6 billion sale of dozens of beauty brands to Coty. He announced that the company would narrow its focus to 65 or 70 of its biggest brands such as Tide, Crest, and Pampers. “Less will be more,” Lafley told analysts. “The objective is growth and much more reliable generation of cash and profit.”2

David S. Taylor, who had spent years managing P&G’s businesses finally took over as chairman and CEO of the firm in November 2015. He has been confident that he can resurrect the firm but has opted against launching new brands or making new acquisitions. “I understand the desire for faster growth and for a single-minded short-term objective, but we’ve seen this movie before” he said at a meeting with analysts last November.3

Fighting off a Decline

For most of its long history, P&G has been one of America’s preeminent companies. The firm has developed several well-known brands such as Tide, one of the pioneers in laundry detergents, which was launched in 1946 and Pampers, the first disposable diaper, which was introduced in 1961. P&G also built its brands through its innovative marketing techniques. Nevertheless, by the 1990s, P&G was in danger of becoming another Eastman Kodak or Xerox, a once-great company that might have lost its way. Sales on most of its eighteen top brands were slowing as it was being outhustled by more focused rivals such as Kimberly-Clark and Colgate-Palmolive.

In 1999, P&G decided to bring in Durk I. Jaeger to try and make the big changes that were obviously needed to get P&G back on track. However, the moves that he made generally misfired, sinking the firm into deeper trouble. He introduced expensive new products that never caught on while letting existing brands drift. He also put in place a company-wide reorganization that left many employees perplexed and preoccupied. During the fiscal year when he was in charge, earnings per share showed an anemic rise of just 3.5%, much lower than in previous years. In addition, during that time, the share price slid 52%, cutting P&G’s total market capitalization by $85 billion.

In 2000, the board of P&G asked Lafley to take charge of the troubled firm. He began his tenure by breaking down the walls between management and the employees. Since the 1950s, all of the senior executives at P&G used to be located on the eleventh floor at the firm’s corporate headquarters. Lafley changed this setup, moving all five division presidents to the same floors as their staff. He replaced more than half of the company’s top 30 managers, more than any P&G boss in memory, and trimmed its work force by as many as 9,600 jobs. Moreover, he moved more women into senior positions. In fact, Lafley skipped over 78 general managers with more seniority to name 42-year-old Deborah A. Henretta to head P&G’s then-troubled North American baby-care division.

In fact, Lafley was simply acknowledging the importance of developing people, particularly those in managerial roles at P&G. For years, the firm has been known to dispatch line managers rather than human resource staffers to do much of its recruiting. For the few that get hired, their work life becomes a career long development process. At every level, P&G has a different ‘college’ to train individuals and every department has its own ‘university.’ The general manager’s college holds a weeklong school term once a year when there are a handful of newly promoted managers.

Under Lafley, P&G also continued with its efforts to maintain a comprehensive database of all of its more than 130,000 employees, each of which is tracked carefully through monthly and annual talent reviews. All managers are reviewed not only by their bosses but also by lateral managers who have worked with them, as well as on their own direct reports. Every February, one entire board meeting is devoted to reviewing the high-level executives, with the goal of coming up with at least three potential candidates for each of the 35 to 40 jobs at the top of the firm.

page C191 

Gambling on its Brands

Above all, however, Lafley had been intent on shifting the focus of P&G back to its consumers. At every opportunity that he got, he tried to drill his managers and employees not to lose sight of the consumer. He felt that P&G has often let technology dictate its new products rather than consumer needs. He wanted to see the firm work more closely with retailers, the place where consumers first see the product on the shelf. In addition, he placed a lot of emphasis on getting a better sense of the consumer’s experience with P&G products when they actually use them at home.

Over the decade of Lafley’s leadership, P&G managed to update all of its 200 brands by adding innovative new products. It begun to offer devices that build on its core brands, such as Tide StainBrush, a battery-powered brush for removing stains and Mr. Clean AutoDry, a water pressure powered car-cleaning system that dries without streaking. P&G also begun to approach its brands more creatively. Crest, for example, which used to be marketed as a toothpaste brand, was redefined an oral care brand. The firm now sells Crest-branded toothbrushes and tooth whiteners.

In order to ensure that P&G continues to come up with innovative ideas, Lafley had also confronted head-on the stubbornly held notion that everything must be invented within P&G, asserting that half of its new products should come from the outside. Under the new ‘Connect and Develop’ model of innovation, the firm pushed to get almost 50% of its new product ideas from outside the firm. This could be compared to the 10% figure that existed at P&G when Lafley had taken charge.

A key element of P&G’s strategy, however, was to move the firm away from basic consumer products such as laundry detergents, which can be knocked off by private labels, to higher-margin products. Under Lafley, P&G made costly acquisitions of Clairol and Wella to complement its Cover Girl and Oil of Olay brands. The firm had even moved into prestige fragrances through licenses with Hugo Boss, Gucci and Dolce & Gabbana. When he stepped down, beauty products had risen to account for about a quarter of the firm’s total revenues.

But P&G’s riskiest moves had been its expansion into services, starting with car washes and dry cleaning. The car washes build on Mr. Clean, P&G’s popular cleaning product. In expanding the brand to car washes, the firm expected to distinguish its outlets from others by offering additional services such as Febreze odor eliminators, lounges with Wi-Fi and big screen televisions and spray guns that children can aim at cars passing through the wash. Similarly, P&G’s dry cleaning outlets are named after Tide, its bestselling laundry detergent. The stores will include drive-through services, 24-hour pickup and environmentally benign cleaning methods.

Losing the Momentum

On July 1, 2009, Lafley passed the leadership of P&G to McDonald, who had joined the firm in 1980 and worked his way up through posts in Canada, Japan, the Philippines and Belgium to become chief operating officer. McDonald took over after the start of a calamitous recession, and had to deal with various emerging problems. Even as consumers in U.S. and Europe were not willing to pay premium prices, the firm’s push to expand in emerging markets was also yielding few results in the face of stiff competition from Unilever and Colgate-Palmolive, who already had a strong presence. Furthermore, commodity prices were surging, even as P&G’s products were already too expensive for the struggling middle-class that it was targeting everywhere.

In order to deal with all of these challenges, McDonald replaced Lafley’s clear motto of “the consumer is boss” with his own slogan of “purpose-inspired growth.” In his own words, this meant that P&G was “touching and improving more consumers’ lives, in more parts of the world, more completely.” “Purpose” was an undeniably laudable ambition, but many employees simply could not fathom how to translate this rhetoric into action. Dick Antoine, P&G’s head of HR from 1998 to 2008 commented: “‘Purpose-inspired growth’ is a wonderful slogan, but it doesn’t help allocate assets.”4

The new focus seemed to fit well with McDonald, who seemed more comfortable with the details of P&G’s operations. Even when McDonald tried to broaden his scope, McDonald found it difficult to establishing priorities for P&G. Given the wide range of problems that he faced, in terms of pushing for growth across several different businesses across many markets, he made some effort to try and address all of them at the same time. Ali Dibadj, a senior analyst at Sanford Bernstein commented on this multi-pronged effort by P&G: “The strategic problem was that they decided to go after everything. But they ran out of ammo too quickly.”5

By the middle of 2012, it was becoming obvious that P&G was struggling under McDonald’s leadership. Known for its reliable performance, the firm was forced to lower its profit guidelines three times in six months frustrating analysts and investors alike. Even within the firm, many executives realized that McDonald would not be able to take the bold moves that may allow the firm to recover from its slump. Activist investor Bill Ackerman commented: “We’re delighted to see the company’s made some progress. But P&G deserves to be led by one of the best CEO’s in the world.”6

Striving for Agility

Shareholder dissatisfaction with lack of improvement in performance led P&G to push McDonald out and bring back Lafley in May 2013. As soon as he stepped back in, Lafley was under pressure to respond to investor concerns that P&G had become too large and bloated to respond quickly to changing consumer demands. In April 2014, he began the process of streamlining the firm by selling of most of its pet food brands—including Iams and Eukanuba—to Mars for $2.9 billion. A few months later, in August 2014, Lafley took a bolder step. He announced that the firm would unload as many as 100 of its brands in order to better focus on 60 to 70 of its biggest ones—such as Tide detergent and Pampers diapers—that generate about 90% of its $83 billion in annual sales and over 95% of its profit (see Exhibits 4 and 5). Lafley did not specify which ones would be sold off or shut down, but the company owns scores of lesser brands such as Cheer laundry detergent and Metamucil laxatives.

EXHIBIT 4 Business Segments, 2016

Source: P&G Annual Report 2016.

Lafley insisted that sales would not be the only criteria for shedding brands. He stated that some large brands would be jettisoned if they didn’t fit with the firm’s core business: “If it’s not a core brand—I don’t care whether it’s a $2 billion brand—it will be divested.”7 He demonstrated this by the decision to spin off its Duracell into a standalone company. Although batteries have been generating $2.2 billion annually in sales, their sluggish growth did not fit with Lafley’s push for a more focused company.

Although analysts have been receptive to the reduction of brands, they have pointed out that P&G has already sold off more than 30 established brands over the past 15 years which were supposedly hindering growth. Many of these sold off brands have been performing well with other firms. J.M. Smucker, for example, that brought Crisco shortening, Folgers coffee and Jif peanut butter, has had 50 percent sales growth since 2009. Some critics charge that P&G, which was once was most successful in building and managing brands, has lost its touch.

In large part, the focus is on the cumbersome centralized and bureaucratic structure that has developed at P&G. Unlike many of its newer competitors, the firm still tends to rely less on working with outside partners. The ‘Connect and Develop’ program that had been started by Lafley to bring in new ideas from outsiders has led to 50 percent of its new technologies coming from outside, but these are then reworked or modified by P&G’s internal R&D group. This has stifled innovation, with most of the firm’s growth coming from line extensions of existing brands or from costly acquisitions.

On November 1, 2015, Lafley stepped down, passing the reins to David Taylor, who had built his career at P&G. He had most recently been assigned to take over the firm’s struggling beauty unit. Taylor continued with Lafley’s strategy of cutting back on P&G’s brands. The sale of 43 of the firm’s beauty brands to Coty in a $12 billion deal was completed in October 2016. A few months earlier, P&G had completed the transfer of Duracell to Berkshire Hathaway through an exchange of shares.

EXHIBIT 5 Financial Breakdown 2016

Source: P&G Annual Report 2016.

Fighting for Its Iconic Status

For years, P&G had spent heavily to build on its success with legacy soap and detergent brands to acquire hundreds of additional brands in new businesses that it hoped could also become part of consumers’ daily routines. The latest effort to jettison over half of its brands indicated that the strategy was not working anymore. In particular, P&G has been struggling with its push to place more emphasis on products that carry higher margins in order to move it away from its dependence on household staples.

The firm’s aggressive push into beauty, for example, has struggled to show much growth. Lafley had tried to build the firm’s presence in this business for years, regarding it as a high margin, faster growing complement to the firm’s core household products. The firm has struggled to show growth in this business and it has been generating the lowest profit margins. Sales of Olay skin care products and Pantene hair care products have mostly sagged in recent years. Its efforts to build a line of perfumes around licenses with Dolce & Gabbana, Gucci and Hugo Boss were also running into problems.

page C194 

Having discarded more than half of its brands over the past two years, P&G was optimistic that its turnaround efforts were starting to show results. On January 20, 2017, the firm offered a more upbeat outlook for sales growth in the coming year. “We are essentially on track with where we hoped we would be,” finance chief Jon Moeller said in a call with analysts.8 Yet a half-dozen analysts have cut their downgraded P&G’s stock over the past month. “Cosmetics, household and personal care stocks are no longer in vogue,” wrote Barclays analyst Lauren Lieberman in a recent report.9

ENDNOTES

1Jennifer Reingold & Doris Burke. Can P&G’s CEO hang on? Fortune, February 25, 2013, p. 69.

2Alex Coolridge. P&G plans to unload more than its brands. Cincinnati Enquirer, August 2, 2014, p. 1.

3David Benoit & Sharon Terlep. Activist Builds $3 Billion Stake in P&G. Wall Street Journal, February 15, 2017, p. A1.

4Fortune, February 25, 2013, p. 70.

5Fortune, February 25, 2013, p. 70.

6Fortune, February 25, 2013, p. 75.

7Cincinnati Enquirer, August 2, 2014, p. 1.

8Sharon Terlep. Procter & Gamble’s Outlook Improves. Wall Street Journal, January 21, 2017, p. B3.

9Alexander Coolridge. 4 Things That Could Sink P&G in 2017. Cincinnati Enquirer, January 15, 2017, p. G2.

* Case prepared by Jamal Shamsie, Michigan State University, with the assistance of Professor Alan B. Eisner, Pace University. Material has been drawn from published sources to be used for purposes of class discussion. Copyright © 2017 Jamal Shamsie and Alan B. Eisner

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Financial ratio analysis A reading prepared by Pamela Peterson Drake

O U T L I N E

1. Introduction 2. Liquidity ratios 3. Profitability ratios and activity ratios 4. Financial leverage ratios 5. Shareholder ratios

1. Introduction As a manager, you may want to reward employees based on their performance. How do you know how well they have done? How can you determine what departments or divisions have performed well? As a lender, how do decide the borrower will be able to pay back as promised? As a manager of a corporation how do you know when existing capacity will be exceeded and enlarged capacity will be needed? As an investor, how do you predict how well the securities of one company will perform relative to that of another? How can you tell whether one security is riskier than another? We can address all of these questions through financial analysis.

Financial analysis is the selection, evaluation, and interpretation of financial data, along with other pertinent information, to assist in investment and financial decision-making. Financial analysis may be used internally to evaluate issues such as employee performance, the efficiency of operations, and credit policies, and externally to evaluate potential investments and the credit-worthiness of borrowers, among other things.

The analyst draws the financial data needed in financial analysis from many sources. The primary source is the data provided by the company itself in its annual report and required disclosures. The annual report comprises the income statement, the balance sheet, and the statement of cash flows, as well as footnotes to these statements. Certain businesses are required by securities laws to disclose additional information.

Besides information that companies are required to disclose through financial statements, other information is readily available for financial analysis. For example, information such as the market prices of securities of publicly-traded corporations can be found in the financial press and the electronic media daily. Similarly, information on stock price indices for industries and for the market as a whole is available in the financial press.

Another source of information is economic data, such as the Gross Domestic Product and Consumer Price Index, which may be useful in assessing the recent performance or future prospects of a company or industry. Suppose you are evaluating a company that owns a chain of retail outlets. What information do you need to judge the company’s performance and financial condition? You need financial data, but it doesn’t tell the whole story. You also need information on consumer

Financial ratios, a reading prepared by Pamela Peterson Drake 1

spending, producer prices, consumer prices, and the competition. This is economic data that is readily available from government and private sources.

Besides financial statement data, market data, and economic data, in financial analysis you also need to examine events that may help explain the company’s present condition and may have a bearing on its future prospects. For example, did the company recently incur some extraordinary losses? Is the company developing a new product? Or acquiring another company? Is the company regulated? Current events can provide information that may be incorporated in financial analysis.

The financial analyst must select the pertinent information, analyze it, and interpret the analysis, enabling judgments on the current and future financial condition and operating performance of the company. In this reading, we introduce you to financial ratios — the tool of financial analysis. In financial ratio analysis we select the relevant information — primarily the financial statement data — and evaluate it. We show how to incorporate market data and economic data in the analysis and interpretation of financial ratios. And we show how to interpret financial ratio analysis, warning you of the pitfalls that occur when it’s not used properly.

We use Microsoft Corporation’s 2004 financial statements for illustration purposes throughout this reading. You can obtain the 2004 and any other year’s statements directly from Microsoft. Be sure to save these statements for future reference.

Classification of ratios

A ratio is a mathematical relation between one quantity and another. Suppose you have 200 apples and 100 oranges. The ratio of apples to oranges is 200 / 100, which we can more conveniently express as 2:1 or 2. A financial ratio is a comparison between one bit of financial information and another. Consider the ratio of current assets to current liabilities, which we refer to as the current ratio. This ratio is a comparison between assets that can be readily turned into cash — current assets — and the obligations that are due in the near future — current liabilities. A current ratio of 2:1 or 2 means that we have twice as much in current assets as we need to satisfy obligations due in the near future.

Ratios can be classified according to the way they are constructed and their general characteristics. By construction, ratios can be classified as a coverage ratio, a return ratio, a turnover ratio, or a component percentage:

1. A coverage ratio is a measure of a company’s ability to satisfy (meet) particular obligations.

2. A return ratio is a measure of the net benefit, relative to the resources expended.

3. A turnover ratio is a measure of the gross benefit, relative to the resources expended.

4. A component percentage is the ratio of a component of an item to the item.

When we assess a company’s operating performance, we want to know if it is applying its assets in an efficient and profitable manner. When we assess a company’s financial condition, we want to know if it is able to meet its financial obligations.

There are six aspects of operating performance and financial condition we can evaluate from financial ratios:

1. A liquidity ratio provides information on a company’s ability to meet its short−term, immediate obligations.

2. A profitability ratio provides information on the amount of income from each dollar of sales.

Financial ratios, a reading prepared by Pamela Peterson Drake 2

3. An activity ratio relates information on a company’s ability to manage its resources (that is, its assets) efficiently.

4. A financial leverage ratio provides information on the degree of a company’s fixed financing obligations and its ability to satisfy these financing obligations.

5. A shareholder ratio describes the company’s financial condition in terms of amounts per share of stock.

6. A return on investment ratio provides information on the amount of profit, relative to the assets employed to produce that profit.

We cover each type of ratio, providing examples of ratios that fall into each of these classifications.

2. Liquidity Ratios Liquidity reflects the ability of a company to meet its short-term obligations using assets that are most readily converted into cash. Assets that may be converted into cash in a short period of time are referred to as liquid assets; they are listed in financial statements as current assets. Current assets are often referred to as working capital because these assets represent the resources needed for the day-to-day operations of the company’s long-term, capital investments. Current assets are used to satisfy short-term obligations, or current liabilities. The amount by which current assets exceed current liabilities is referred to as the net working capital.1

The role of the operating cycle

How much liquidity a company needs depends on its operating cycle. The operating cycle is the duration between the time cash is invested in goods and services to the time that investment produces cash. For example, a company that produces and sells goods has an operating cycle comprising four phases:

(1) purchase raw material and produce goods, investing in inventory;

(2) sell goods, generating sales, which may or may not be for cash;

(3) extend credit, creating accounts receivables, and

(4) collect accounts receivables, generating cash.

The operating cycle is the length of time it takes to convert an investment of cash in inventory back into cash (through collections of sales). The net operating cycle is the length of time it takes to convert an investment of cash in inventory and back into cash considering that some purchases are made on credit.

The number of days a company ties up funds in inventory is determine by:

(1) the total amount of money represented in inventory, and

(2) the average day’s cost of goods sold.

The current investment in inventory — that is, the money “tied up” in inventory — is the ending balance of inventory on the balance sheet. The average day’s cost of goods sold is the cost of goods

1 You will see reference to the net working capital (i.e., current assets – current liabilities) as simply working capital, which may be confusing. Always check the definition for the particular usage because both are common uses of the term working capital.

Financial ratios, a reading prepared by Pamela Peterson Drake 3

 
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