Proctor And Gamble

University of Houston-Victoria
School of Business Administration

Individual Project

Procter and Gamble

Submitted by:

Frank J. Paul

October 18, 2009

Seminar in Strategic Management – MGT 6359 (Section 34509)
University of Houston - Victoria Fall 2009

Instructor: Dr. T. T. Selvarajan

Table of Contents

1.0.0 External Environmental Analysis…………………………………………

3

1.1.0 General Environmental Analysis……………………………………………

3
1.1.1 Demographic Segment……………………………………………….

3
1.1.2. Economic Segment………………………………………………….

6
1.1.3 Political/Legal Segment………………………………………………

10
1.1.4 Social-Cultural Segment………………………………………………

11
1.1.5 Technological Segment……………………………………………….

12
1.1.6 Global Segment……………………………………………………….

15
1.1.7 Summary of General Environment Analysis………………………….

15

1.2.0 Driving Forces………………………………………………………………….

16

1.3.0 Industry Analysis………………………………………………………………..

19
1.3.1. Description of the Industry……………………………………………..

19

10/18/2009 Procter & Gamble Page 2 of 87

1.3.2. Industry Dominant Economic Features………………………………….

19
1.3.3. Industry Trends………………………………………………………….

20
1.3.4. Summary of Industry Analysis………………………………………….

21

1.4.0 Five Forces Competitive Analysis…………………………………………..…..

22
1.4.1. Threat of New Entrants…………………………………………………

23
1.4.2. Power of Buyers………………………………………………………..

24
1.4.3. Power of Suppliers……………………………………………………….

24
1.4.4. Threat of Substitutes……………………………………………………..

25
1.4.5. Intensity of Rivalry……………………………………………………….

25
1.4.6. Summary of Five Forces Competitive Analysis………………………….

26

1.5.0 Competitor Analysis……………………………………………………………….

26
1.5.1 What Market Positions Rivals Occupy…………………………………….

26
1.5.2 Strategic Group Maps of Competitors…………………………………….

27
1.5.3 Competitor’s Strategies……………………………………………………

28


1.5.4 Strengths and Weaknesses of Competitors……………………………….

30
1.5.5 Competitor’s Next Moves…………………………………………………

32
1.5.6 Competitive Advantage of the Company in Relation to the Rivals………

32
1.5.7 Summary of Competitor Analysis………………………………………..

33


2.0.0 Internal Analysis and SWOT Analysis

2.1.0 Financial Analysis………………………………………………………………..

34
2.1.1 Valuation Analysis………………………………………………………

35
2.1.2 Growth Analysis…………………………………………………………

35
2.1.3 Profitability Analysis……………………………………………………

36
2.1.4 Financial Strength Analysis……………………………………………..

36
2.1.5 Dividend Analysis………………………………………………………

37
2.1.6 Management Efficiency Analysis……………………………………….

37
2.1.7 Stock Price Analysis…………………………………………………….

38
2.1.8 Summary of Financial Analysis…………………………………………

39

2.2.0 Strategic Analysis………………………………………………………………

39
2.2.1 Current Business Level Strategies……………………………………….

39
2.2.2 Elements of Company’s Strategy………………………………………..

40
2.2.3 Components of Company’s Business Level Strategy…………………….

42
2.2.4 How Well the Company’s Strategy is Working…………………………


43
2.2.5 Summary of Strategic Analysis………………………………………….

44

2.3.0 Value Chain Analysis…………………………………………………………….

44
2.3.1 Analysis of Primary Activities…………………………………………..

45
2.3.2 Analysis of Support Activities……………………………………..……

46
2.3.3 Analysis of Company’s Cost Competitiveness in Relation to Rivals……

46
2.3.4 Summary of Value Chain Analysis………………………………………

47

2.4.0 SWOT Analysis…………………………………………………………………

48
2.4.1 Strengths……………………………………………………………….

48
2.4.2 Weaknesses………………………………………………………………

49
2.4.3 Opportunities…………………………………………………………..

50
2.4.4 Threat………………………………………………………………….

51
2.4.5 Summary of SWOT Analysis………………………………………….

51

3.0.0 References…………..………………..………………………………………..


52

1.0.0 External Environmental Analysis
1.1.0 General Environment Analysis

All companies whether global, regional, or local operate in a macro-environment

shaped by influences stemming from the economy at large, population demographics,

societal values and lifestyles, governmental legislations and regulations, technological

factors, and the industry and competitive arena in which the company operates. Most

organizations do not have direct influence on its broad environment such as society, the

economy, technology, global politics; it can shield itself from most threats and take

advantage of opportunities as they present themselves.

Many major companies have lost industry dominance, market share, or gone out

of business because of their failure to recognize and adapt to changes in their

environments, or by failing to be leaders in making necessary changes. The key point is

that an organization needs to be in tune with its often turbulent external environment.

There must be a strategic fit between what the external environment needs or wants and

what the organization has to offer.

1.1.1 Demographic Segment

Population Size

The world population is in the midst of an unprecedented transformation brought

about by the transition from a regime of high mortality and high fertility to one of low


mortality and low fertility. This demographic transition is responsible for the rapid and

accelerating growth that the world population experienced in the twentieth century as

well as for the slowing down of that growth and for the changes in the age distribution

associated with those developments (United Nations, 2005). Figure 1 below, illustrates

the World’s population growth over a 100 year span. Procter and Gambles currently

sales over 300 brands in over 180 countries around the world to people from all ages,

genders, ethnicity, social classes, and walks of life. The increase in the world’s

population provides a direct opportunity for P & G to increase the number of products

sold each year (Procter & Gamble 2009).

Figure 1

World Population: 1950-2050

10
Population (billions)

8

6

4

2

0
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Year

Source: United Nations

The emerging markets of Africa, Asia and Latin America present significant

opportunities for P&G because of the growth in the number of people that will be within

P & G target market. The graph below represents the percentage of the world’s

population mix by continent.

Table 1


Population Percentage Estimates
Continent 1950 1975 2000 2010 2025 2050
Africa 8.99% 10.31% 13.40% 14.95% 17.48% 21.84%
Asia 55.46% 58.59% 60.48% 60.31% 59.57% 57.17%
Europe 21.64% 16.65% 11.88% 10.61% 9.10% 7.55%
Latin America and the
Caribbean 6.61% 7.96% 8.52% 8.52% 8.36% 7.97%
North America 6.78% 5.97% 5.21% 5.09% 4.96% 4.90%
Oceania 0.51% 0.52% 0.51% 0.52% 0.53% 0.56%
World 100% 100% 100% 100% 100% 100%
Source: Geohive

1.1.2 Economic Segment

The United States, the country with the world’s largest economy, is currently in

an economic recession. Since the recession began in December 2007, the real gross

domestic product (GDP), the total value of U.S. goods and services produced in a year

and a basic measure of an economy’s performance, dropped at an annual rate of more

than 6 percent in the fourth quarter of 2008. Federal Reserve Chairman Ben Bernanke

said conditions in the labor market and declines in the value of housing along with tight

consumer credit conditions will continue to hold consumers back from spending more

until they experience a loosening of conditions that impact them directly. Bernanke said

economic activity abroad is also an important consideration in how soon the U.S.

economy rebounds. He states “the steep drop in U.S. exports that began last fall has been

a significant drag on domestic production, and any improvement on that front would be

helpful”. (America.gov)

1.1.3 Political/Legal Segment

With the U.S. economy currently experiencing a recession, other countries may

not be far behind. Japan, Britain, Spain and Singapore, which together represent about 12


percent of the world’s economy, are equally vulnerable as fallout from the U.S. worsens

their economic weakness. Even emerging markets, including China, are likely to suffer as

exports to the U.S diminish.

The developing slump has put pressure on central bankers in Japan, the U.K. and

the euro region to follow the lead of Federal Reserve Chairman Ben S. Bernanke, who in

the 1st quarter of 2009 accelerated interest- rate cuts in the U.S. with an emergency move

to lower the benchmark rate by three-quarters of a percentage point.

The effect of the U.S. recession, which according to the IMF represents about 21

percent of the global economy, is spreading via multiple channels. There is less spending

by American consumers and companies are reducing demand for imported goods. The

meltdown of the U.S. subprime-mortgage market has pushed up credit costs worldwide

and forced European and Asian banks to write down billions of dollars in holdings.

Tumbling U.S. stock prices are also dragging down markets elsewhere. (Miller 2009)

1.1.4 Socio-Cultural Segment

Women form the major target group for household, personal products and

consumer goods companies. Several P&G consumer products, such as skin care and

beauty care, are addressed directly to women. Other products, such as food and

beverages, home cleaning and detergents are addressed to women as the primary decision

makers or decision influencers. In addition to the media choice, companies have to decide

on the type of programs they sponsor, so as to attract the attention of their target

audience.

1.1.5 Technological Segment

Organizations are rapidly trying to incorporate the Internet into their supply chain

practices. Global competitive pressure and heightened shareholder expectations have


accelerated the rate of Internet adoption.Electronic markets are Web sites where buyers

and sellers converge to advertise, bid for products in auctions, post catalog information,

procure inventory, and manage inventory and fulfillment. An electronic market can be

aligned vertically, focusing on the procurement of industry-specific products such as

paper, metal, chemicals, agriculture, and energy. Or it can be horizontal, providing

products for a diverse range of industries. These markets act as hubs where buyers can

procure direct goods, and suppliers can market their products. In many respects, the

electronic market is a microcosm of the many-to-many supply chain market advocated

earlier.

Today, electronic markets deal mostly with transactions related to the

procurement of indirect and direct goods, whether they are by auction, request for

proposal (RFP), spot electronic procurement, or e-catalogs. P&G can use the electronic

marketplaces to consolidate its location on where to procure goods, which can immensely

lower the administrative and inventory costs. It also provides P&G and others an

additional channel to market their goods. (Kahl & Berquist 2000).

1.1.6 Global Segment

Procter and Gamble operates in more than 80 countries worldwide and sells more

than 300 products to over 5 billion people. The health of each nation’s economy and the

global economy as a whole affects P&G operations immensely. Given the current

economic recession of the United States, the world’s largest economy, the International

Monetary Fund predicts that the world economy, which grew by a robust 4.9% last 2007,

to slow sharply. The IMF predicts the global economy to grow by 3.7% in 2009 and 3.8%

in 2010 (IMF says U.S. recession, 2008). The graph below, lists the Current U.S.

Economic Indicators.


Table 2

Current U.S. Economic Indicators
October 06, 2009 (Close of Day)

Indicator Value
Inflation % -1.44
GDP Growth % -0.74
Unemployment % 9.80
Gold $/oz 1,038.75
Oil $/bbl 70.88
Prime % 3.25
Source: www.forecast.org
1.1.7 Summary of General Environment Analysis

In the fast changing world of electronic commerce, no industry has been left

untouched by the impact of the Internet and the World Wide Web. The Internet has

caused fundamental shifts in the way consumers shop for and purchase goods and

services. This shift has the most impact on the household and personal care industry.

This industry is very dependent on the population growth of both developed and

developing countries. Major companies such as Procter and Gamble (P&G), market their

products to every demographic member of the global community. The final factor

affecting this industry is the current state of the global economy, especially the United

States with the world’s largest economy.

1.2.0 Driving Forces

Product innovation

Procter & Gamble attempts to maintain its competitive edge by focusing on

product innovation. P&G currently spends almost twice as much on R&D spending

nearly $2.2 billion in 2008 as its closest competitor.

The two most important factors in P&G's innovation process are its practice of

consumer demand research and its "Connect and Develop" R&D structure. When P&G


first enters a new market it sets up in-home visits with consumers in order to fully

comprehend the needs, wants, and desires its’ potential consumers have for household

and personal products. P&G also incorporates consumers' input into the R&D process

through its "Connect and Develop" initiative. Through "Connect and Develop" P&G has

an online website where people can submit what P&G calls “game-changing product”

ideas, and provide input on topics such as packaging, product improvement and services

offered. P&G’s staff collects and sorts through all the ideas and work with the most

promising ones. This process is not responsible for the entire R&D that P&G does, but

approximately 42% of new products in the last several years were influenced by or

originated from "Connect and Develop." (PGconnectdevelop.com)

Regulatory influences and government policy changes

Several consumer protection groups are voicing concerns over the presence of

harmful chemical ingredients in cosmetic products. A recent study showed that about one

third of cosmetic products contain carcinogens. Due to increasing public pressure, the

U.S. Food and Drug Administration is expected to impose stringent quality norms on

cosmetic products. New regulations may delay the launch of new products for companies

like P&G and result in higher product development expenditure. In Europe new rules on

ingredients contained in a European Union draft are expected to come into force this year

and a European Chemicals Agency has been created to improve regulation of products.

The cost of compliance with more stringent regulations creates new barriers of entry and

increases the number of counterfeits of household and personal care products on the

market. P&G and other companies must monitor and try to control the widespread use of

counterfeit products because they can both weaken a companies' brand image, and also

divert revenues that should be obtained by the brand's owner.


Changes is cost

P&G depends heavily on a diverse number of global commodities for

manufacturing its goods. Since 2002 prices have risen by nearly 50%. Nearly half of the

P&G’s cost of goods is directly related to commodity goods. The company has increased

prices due to higher costs of oil and other raw materials. In its recent conference call, the

company stated that it expected raw material costs to increase $3 billion in 2009. The

company has raised prices on most products such as Cascade dishwashing detergent,

Iams pet food, and Gillette razors to counter the increasing cost of oil in the first half of

2008. As the market leader, the company does benefit from pricing power and can

moderate commodity inflation better than its competitors (Wolf, 2008).

Some commodities of note:

▪ Coffee prices affect P&G’s Folgers’s brand, which most suffered from the rising
coffee prices as a result of Hurricane Katrina
▪ Growing paper pulp prices affect several of the company's tissue businesses, as
well as many of its products' paper packaging
▪ Increasing petroleum prices affect the fabric and home care businesses.
▪ Natural gas is a key energy input into the manufacturing process of toilet and
diaper goods, which are air dried

Changing societal concerns, attitudes, and lifestyles

Societal concerns, attitudes, and changing lifestyle not only affect P&G but every

company in the world that provides products, goods and services. P&G has faced a

number of boycotts over the years concerning the use of animals in testing the effects of

its products. Animal rights organizations argue that it is not only the specific practices of

individual companies that cause problems, but the attitude created by the currrent system

of exploitation that gives power and profits to the few, at the expense of people, animals

and the environment. They feel it is important to expose the unethical practices of

specific companies as their behavior is often indicative of the entire system.


P&G admitted in 2005 at the 5th World Congress on Alternative and Animal Use

in the Life Sciences in Berlin, Germany that “P&G sometimes conducts research using

animals to demonstrate safety or efficacy in pharmaceuticals, pet nutrition studies and for

consumer products. Such studies are only conducted as a last resort once all other

reasonable options have been excluded”. P&G stated that it ultimately wants to eliminate

the need for all research involving animals for consumer products and their ingredients

(Procter & Gamble at the 5th World Congress, 2005).

In the meantime, P&G is dedicated to use non-animal alternatives whenever

possible across the company. P&G also stated that a large majority of its research studies

do not employ animals. Animal testing is therefore the exception, not the rule at P&G.

In order to control and protect its company image, P&G has been working with

government and different academia to promote the acceptance of alternative ways for

testing its products. P&G claim that it wants to ultimately eliminate the need for all

research involving animals for consumer products and their ingredients (Procter &

Gamble at the 5th World Congress, 2005).

1.3.0 Industry Analysis

The global household and personal products industry generated total revenues of

$503.3 billion in 2008. During the period from 2004 to 2008 the compound annual

growth rate (GAGR) was approximately 3.8%. The sales of personal products proved to

be the most lucrative for the global household and personal products industry in 2008,

generating total revenues of $408.5 billion, equivalent to 81.17% of the industry's overall

value. The performance of the industry is forecast to decelerate slightly, with an

anticipated CAGR of 3.7% for the five-year period 2008-2013, which is expected to drive


the industry to a value of $602.7 billion by the end of 2013 (Household & Personal

Products, 2008).

Table 3
Compound Annual Growth Rate for Global Household
& Personal Products Industry
Year Total Revenue % Growth Rate

2004 434.1
2005 451.1 3.9%
2006 468.5 3.9%
2007 485.5 3.6%
2008 503.3 3.7%
2004-2008 3.8%
Source: Datamonitor

1.3.1 Description of the Industry

The global household and personal products industry consists of the global

household products and personal product markets. Manufactures in this industry focus on

selling products that meet the needs of everyday consumers in areas such as personal

hygiene, beauty and health, pet care and other household products. They also produce

and manufacturer different fragrances, hair care, make-up, oral hygiene, dishwashing

products, furniture polish, general purpose cleaners, insecticides, scouring products,

textile washing products and toilet care products. Procter and Gamble (P&G) is currently

the market leader with over 16% of the market share in this diverse and crowed industry.

Below, Figure 2 illustrates major manufactures in the industry and their perspective

market share.

Figure 2


Global Household & Personal Products Industry Share %

16.60%

Procter & Gamble
5.40% Unilever
L'Oréal S.A.
5.00%
Kimberly-Clark
5.60% Johnson & Johnson
62.40%
3.20% Other

Source: Datamonitor & Kimberly-Clark’s 10-K annual report

1.3.2 Industry Dominate Economic Features

Market size and growth rate

The global household and personal care industry generated total revenues of $40.7

billion in 2008, representing a compound annual growth rate (CAGR) of 3.7% for the

period spanning 2004-2008. In comparison, the Americas and European markets grew

with CAGRs of 4.5% and 2.7%, respectively, over the same period, to reach respective

values of $13.9 billion and $16.7 billion in 2008. Market consumption volumes increased

with a CAGR of 3.1% during 2004-2008, to reach a total of 10.6 billion units in 2008.

The market's volume is expected to rise to 12.2 billion units by the end of 2013,

representing a CAGR of 2.9% for the 2008-2013 periods. (Household & Personal

Products, 2008).

Number of rivals

The global household and personal products industry is a highly fragmented

industry with an enormous amount of products and manufactures. P&G faces competition

from local, low-cost manufacturers in developing countries and from increasing private


label brands introduced by large format retailers and discounters worldwide. P&G’s

products must effectively compete with products from strong competitors as well as that

of retail chains at all times (Procter & Gamble Company 2008).

Scope of competitive rivalry

There are considerable substitutes for all of P&G's product offerings, creating an

intense competitive environment. In order to differentiate itself, the P&G must continue

to provide new, innovative products and branding to the customer.

Number of buyers

Although P&G is an extreme large company, its future is dependent on buyers.

Wal-Mart is P&G largest customer and accounted for over 15% of P&G total revenue in

2009, 2008, and 2007. This percentage of total revenue gives Wal-Mart the ability to

bargain with the P&G for lower prices, which would result in lower earnings. The current

credit crisis will not have a significant impact on P&G because of the diversity and

“recession-proof” status of its products. The products that P&G offers can sustain a

slowdown or recession in the US economy because of their product types. Consumers

will continue to purchase these goods through an economic correction. While P&G had

disappointing 2nd quarter earnings due to higher commodity costs in 2009, analysts’

reports indicate strong sales forecasts and growth opportunities for the rest of the year.

Degree of product differentiation

Procter and Gamble has one of the most diversified product portfolios among

leading global manufactures and marketers of consumer products. P&G participates in

more than 40 product categories with 300 brands in over 60 different markets.

The company is organized into three global business units (GBUs): Beauty,

Health and Well-Being, and Household Care. Please see Figure 21 for P&G three GBUs.


In the beauty segment, the company's products include cosmetics, deodorants, feminine

care products, hair care, personal cleansing and skin care products. Tooth paste,

pharmaceuticals, personal healthcare, and pet food products are marketed under the

healthcare segment. The home care segment comprises of fabric care, hair care, dish care

and surface care products. In addition, P&G's products include baby care and family care

products such as diapers, baby wipes and bath tissue. The recent purchase of Gillette will

add blades and razors, batteries, electric razors, and small appliances to its broad product

offering. The company has more than 20 brands with sales exceeding one billion dollars,

which, together, have sales of over $24 billion. Brands include Pampers, Tide, Ariel,

Always, Whisper, Pantene, Bounty, Pringles, Crest, Clairol Nice 'n Easy, Actonel, Dawn

and Olay (Procter & Gamble 2009).

Product Innovation

P&G’s global scale allows it to quickly flow innovation across developing

countries. The diversity of P&G’s brand portfolio gives it the opportunity to innovate in

more aspects of consumers’ lives than nearly any other company. P&G brands are in

every room of the house, at virtually every hour of the day. As a result, P&G is able to

get a better sense of consumers’ needs than other companies. This helps them spot more

problems and allows P&G innovations to help solve consumer’s needs and wants.

Demand Drivers

Demand drivers in the household and personal care products industry include

some of the following categories: price, demographics, household income, and

innovation. The industry is mainly comprised of necessity products; meaning that even in

times of recession, sales remain steady. The price of the product is generally reflected on

the quality of the product and consumer preferences over a brand name or private label


brands. Disposable income also plays a role, if a consumer has more disposable income,

they may buy the more expensive product.

Pace of technological change

Procter & Gamble’s advertising and R&D is spread over 44 brands that account

for 90% of the company’s profits. This allows P&G more opportunities to leverage

proprietary technology among multiple categories. Moreover, P&G’s research and

development is enhanced by a global relationship with nearly two million researchers in

technology areas connected with P&G businesses. New products can be quickly brought

to market using P&G’s existing brands and distribution system. P&G’s relative level of

innovation is apparent from the results of the 2008 industrial research institute’s pace

setter study that measures the top new products measured by sales. In 2008, P&G had 10

out of 25 of the top new products in the non-food category. In comparison, Unilever, J&J,

Kimberly Clark, Colgate (CL), L’Oreal (LRLCY.PK), and Energizer (ENR) collectively

had 7 (Q4, 2009)

Vertical Integration

Procter & Gamble, along with many of its top competitors have formed strategic

alliances and partnerships with suppliers such as Wal-Mart, Costco and other retailers in

order to improve is supply chain management, reduce storage cost and improve

efficiency. P&G has also created a special website for its customers called P&G

Everyday Solutions where its customers can get product updates, free samples, and print

coupons.

Economies of Scale

P&G will continue to innovate because economies of scale allow P&G to spend

much more than rivals on R&D. For example, P&G spends over twice as much on


research and development than its nearest competitor. P&G’s largest competitors by

trailing 4 quarters revenue are Unilever (UL) ($60B), Kimberly Clark (KMB) ($19B),

and Johnson & Johnson’s (JNJ) consumer segment ($16B). Moreover, the same

economies of scale allow P&G to efficiently signal this value to consumers through

advertising. P&G economies of scale allow it to meet consumer needs in a particular

region and then quickly flow that technology across multiple countries faster than its

competitors.

Learning / Experience Curve Effects

Globally, there are many household care and personal product companies that

P&G must constantly be aware of and their decisions. Switching costs remain very low

in this industry and it allows consumers to easily switch their brands because of product

dissatisfaction, increased costs, or even out-of-stocked items.

Also it is becoming more difficult for consumers to differentiate competing

brands as the number of product introductions is continually increasing. Companies

within the industry are regularly enhancing older product lines, while new product lines

are also being introduced. Being first to market can be extremely profitable for P&G or

any other company, but it could also back fire as more brands and product features are

offered, thus making it more difficult for consumers to differentiate among the products

that are available.

1.3.3 Industry Trends

The personal care industry had an excellent growth rate in all the major markets

of the world in 2005-2006. Since the past few years, people have become more conscious

about their appearance and look, which has led to a huge demand for these products

worldwide. New products are launched by the leading brands to attract consumers. The


trends in all the leading personal care markets show that this industry has massive

potential for growth. The women’s beauty industry is also growing at a rate of

approximately USD 202.254 billion every year where as the global market for cosmetics

alone USD 30.33 billion. The global personal care products industry is growing at a very

rapid pace; some of the factors directly responsible for this growth are:

▪ Rise in consumer spending power

▪ Increased demand due to people consciousness

▪ Entry of herbal and organic products

▪ Lifestyle and climactic changes, and

▪ Massive advertising and promotion strategy

1.3.4 Summary of Industry Analysis

In summary, the household and personal products industry is a mature,

fragmented, and stable industry. The industry is considered highly competitive with

considerable substitutes for most products on the market. In such a climate companies

must be able to differentiate themselves and build customer loyalty by providing

outstanding service and providing new, innovative products and branding to the everyday

customers.

The majority of developed countries are predicted to have only a small population

increase in the next decade. The developing and emerging markets will provide P&G

and other manufactures with incredible and unprecedented growth opportunities as

economies become more globally intertwined. Most of the products within this market

are considered recession proof and are considered necessities, therefore demand is

typically stable.


1.4.0 Five Forces Competitive Analysis

Michael Porter developed a framework consisting of five competitive forces,

which analyze how industry factors impacts a company's strategy. These factors are: the

threat of new entrants, power of buyers, power of suppliers, availability of substitutes and

competitive rivalry (Porter, 1985).

Figure 3
Porter's Five Competive Forces

Potential
Entrants

Suppliers' Power Industry Buyers' Power
Competitors

Substitutes

Source: Michael Porter’s Competitive Advantage

1.4.1 Threat of New Entrants

The enormous amount of products that are distributed under Procter & Gamble's

name creates a challenge for new entrants. Since the P&G possess a significant amount of

market shares around the world, a potential competitor that lack large sums of capital for

heavy marketing and research and development, would hardly be able to effectively

compete. However, there is concern about firms that specialize in niche markets. This

type of company could possibly become a threat to P&G's corresponding business

segment. Proctor and Gamble must continue to expand its operations internationally, due


to the decline of the US dollar to other currencies and the emergence of new markets,

such as India or China.

1.4.2 Power of Buyers

Although P&G is an extreme large company, its future is dependent on buyers.

P&G is heavily dependent on Wal-Mart and its affiliates for generating a major part of its

revenue. Sales to Wal-Mart and its affiliates have represented approximately 15% of its

total revenue since 2006 thus creating the “Wal-Mart effect.” High dependence upon

Wal-Mart reduces the bargaining power of P&G. Wal-Mart could use its bargaining

power to impose unfavorable terms on the company. Any decrease in revenue from Wal-

Mart could have a negative impact on the company's businesses.

1.4.3 Power of Suppliers

P&G has a codependent relationship with most of its suppliers. In order to

generate above average revenues the P&G needs various quality materials for product

production at the best prices available. Suppliers of these materials also need key

customers like P&G for profitable revenue generation and will very likely have little

bargaining power because of its small size. P&G can use its tremendous size and large

amounts of available cash to its advantage during this current credit crisis. Rising interest

rates and the declining availability of credit ultimately should not affect P&G’s

relationship with its suppliers. P&G’s successful history and large market share can be

used to back its borrowings, under the assumption that P&G continues to maintain its

current market share.

1.4.4 Threat of Substitutes

There is substantial number of substitutes for all of P&G's product offerings,

creating an intense competitive environment. In order to differentiate itself, the P&G


must continue to provide new, cutting edge, and innovative products and branding to the

customer. P&G notes that working collaboratively with customers and developing deep

shopper and consumer understanding will improve the in-store presence of its products

and win the "first moment of truth." This happens when customers choose which brands

to buy. Winning the "second moment of truth," when consumers decide whether P&G

products deliver on the brand promise, is essential for growth in such a competitive

environment (Procter & Gamble 2009).

1.4.5 Intensity of Rivalry

The intensity of rivalry is very high in this industry. P&G has several strong

competitors in different markets like Amway Corporation, Intimate Brands, Colgate-

Palmolive Company, Kimberly-Clark, Maybelline, Johnson & Johnson, Revlon, Inc.,

Estée Lauder, General Mills, S.C. Johnson & Son, Unilever, Sara Lee Corporation among

other big and medium sized competitors (Jones, 2005). Another important element

affecting the intensity of rivalry is that the switching costs in this industry are quite low

as it does not cost anything for a consumer to buy one brand of a consumer product

instead of another. The thing in favor of P&G is that unlike most of its competitors, who

use wholesalers who sell a variety of competing products, P&G’s network, while

independently owned and operated, mainly sells only P&G products giving the company

a slight competitive advantage.

1.4.6 Summary of Five Forces Competitive Analysis

The Michael Porter's Five Force Competitive Analysis is a powerful tool that

helps business managers understand both the strength of their company’s current

competitive position and whether new products, services or businesses have the potential

to be profitable. With a clear understanding of where power lies, managers can take


advantage of a company’s situation of strength, improve a situation of weakness, and

avoid taking wrong steps.

The factors affecting P&G are economic, political, social, technological

advancements, environmental and legal. A detailed SWOT analysis revealed that the

company enjoys the strengths of a strong brand, R&D capabilities and strong global

infrastructure but also depends too much on a few top customers such as Wal-Mart and

mature markets. P&G should leverage its strengths to realize opportunities in emerging

markets and thwart away the threat from intense competition and increase in raw

materials. In the consumer products industry, P&G has a limited supplier power, mixed

buyer power, high risk of substitutes, intense competition and enjoys low risk of new

entrants.

1.5.0 Competitor Analysis

The global household and personal care industry is an $82.6 billion dollar

industry. It is projected to have a market value of $95.1 billion by 2013. In 2008, the

United States accounted for over $17.2 billion and Europe was estimated to be around

$35.1 billion. Supermarkets and hypermarkets lead the global household products

market, distributing 56.1% of the market’s overall value. P&G accounts for 17.1% of the

global household and personal care products market value.

Procter & Gamble principal activity is manufacturing and marketing consumer

products. It operates in six business segments: Beauty; Grooming; Health Care; Snacks,

Coffee and Pet Care; Fabric Care and Home Care. The Beauty Care segment includes

cosmetics, deodorants, fragrances, hair care and other products. Grooming includes

blades and razors, electric hair removal devices, face and shave products and home

appliances. The Health Care segment includes feminine care, oral care, personal health


care and pharmaceuticals. The Snacks, Coffee and Pet Care segment includes coffee, pet

food and snacks. The Fabric Care and Home Care business includes air care, batteries,

dish care, fabric care and surface care. The Baby Care and Family Care business includes

baby wipes, bath tissue, diapers and facial tissue. Some of its brands are Head &

Shoulders, Olay, Pantene, Gillette, Oral-B, Pringles, Ariel, Tide, Downy and Pampers.

The products are sold in more than 180 countries around the world.

1.5.1 What Market positions rivals occupy

Procter & Gamble (P&G) is the world's largest producer of household and

personal products by revenue with net sales of $83,503 million and with its products

reaching 4 billion people worldwide. P&G's product line includes 24 brands across

beauty, healthcare, and food including Tide detergent, Pampers diapers, and Gillette

razors, that generate over $1 billion in revenue annually. One of the key areas of growth

for the company is in emerging markets worldwide. Sales in developing nations have

increased steadily from 20% of total revenue in 2002 to 30% in 2008. According to

Wikinvest.com P&G already owns a large and growing market share in countries

including China and Russia. In light of the global economic downturn, P&G has

announced it will focus its growth strategy on emerging markets, opening almost all of its

20 new manufacturing facilities outside its established markets.

Johnson & Johnson (JNJ) is the world's second largest and most broadly based

manufacturer of health care products, with 2008 annual sales of $63.8 billion. The

company holds a significant share of the consumer and pharmaceutical markets, and is

the world's largest developer and manufacturer of medical treatment and diagnostic

devices. In the company's continuing effort to diversify its business and increase profits,

JNJ is constantly acquiring new companies. According to Wikinvest.com, JNJ acquired


8 companies in 2008. JNJ over-the-counter pharmaceuticals and nutritionals include:

skin care, baby & kids care, and women's health products, totaling $16.0 billion in sales

in 2008. Although the Consumer Health Care division is the smallest of the company's

three segments, it includes some of the company's most recognizable brands such as

Tylenol, Neutrogena, and Band-Aid.

Kimberly-Clark is a consumer products giant with 19.4 billion in sales for FY

2008 and net income of $1.7 billion. KMB is microscopic in comparison to P&G, but

nevertheless a large force to be reckoned within the consumer products industry. In fact,

KMB continues to hold a significant market share in household and personal care

industry, with the No. 1 or No. 2 market share position in more than 80 countries. In

order to see continued growth and profits, however, Kimberly-Clark must develop new

innovative products or figure out a way to compete more effectively with its current line

of products. If KMB cannot do this, it is possible that the company will become

increasingly less profitable.

1.5.2 Strategic group maps of competitors

Driving forces and competitive pressures do not affect all strategic groups evenly.

Profit prospects vary from group to group based on the relative attractiveness of their

market potential. A Strategic group is a cluster of firms in an industry with similar

competitive approaches and market positions. Strategic group mapping is an analytical

tool for displaying the different market and/or competitive positions that rival firms

occupy in a particular industry. Figure 4 and Figure 5 below represent the strategic group

map of the household and personal care industry with three main competitors.

Figure 4


Household and Personal Care
Industry Strategic Group Map

High
Johnson &
Johnson

Procter &
Net Income

Gamble

Kimberly
-Clark
Low

Number of Operations in Different Countries
Low High

Figure 5
Household and Personal Care
Industry Strategic Group Map
High

Procter &
Gamble
Market Share

Kimberly
-Clark

Johnson &
Johnson
Low

Advertising Expenditure
Low High


1.5.3 Competitor’s Strategies

JNJ diverse revenue base has helped insulate it from the highs and lows that affect

its competitors from time to time. As a result of this and its acquisition strategy, JNJ has

reported more than 70 years of sales growth and produce impressive free cash flow,

which is its operating cash flow less capital expenditures, reaching almost 20% of sales.

This excellent cash generation has enabled JNJ to grow its dividend for the last 44 years,

a trend that is expected to continue in the next couple of years.

KMB has been expanding its portfolio of services by entering into strategic

agreements, and acquiring alliances in order to strengthen its position in the industry. In

March of last year, KMB decided to purchase the remaining shares of its South African

subsidiary, Kimberly-Clark of South Africa (K-CSA) from the Lion Match Company. K-

CSA is a leading manufacturer and marketer of tissue, personal care and business-to-

business products and also markets Kimberly-Clark's line of health care products. KMB

increased ownership in K-CSA will allow it to expend its international reach and gain

market share in the African region.

1.5.4 Strength and Weaknesses of competitors

Johnson & Johnson (JNJ), the world’s leading consumer health company, is

engaged in the R&D, manufacture and sale of household and personal care products,

pharmaceuticals and medical devices and diagnostics. JNJ has a number of strengths and

weaknesses which are depicted in the table below.

Table 4
Strengths Weakness
▪ Strong Brand Image ▪ Over Dependence on Pharmaceutical Sales
▪ R&D ▪ Lack of size in therms of revenue
▪ Interaction with Customers ▪
▪


J&J attaches great importance to developing an understanding about its products

among consumers, doctors and medical professionals. There is also a constant focus on

educating customers. This constant interaction with customers has afforded JNJ the

ability to grow its brand image that is almost unparallel to anyone else. JNJ’s R&D team

of scientists works in partnership with the marketing department and product supply

teams to improve products, packaging and supporting advertising claims. Several new

products have been developed and launched successfully by understanding the

consumer’s wants, needs, and requirements. Despite its remarkable strengths, JNJ has a

number of weaknesses. More than 40% of J&J’s revenue currently comes from its

pharmaceutical group, with seven drugs each bringing in more than $1 billion in sales.

Even with a strong brand portfolio and geographically diversified operations, JNJ lacks

the size, in terms of revenue, to compete with companies like Procter & Gamble, whose

revenues for the fiscal year ended June 2008 were $83,503 million, where as JNJ were

$63,747 million.

Kimberly-Clark Corporation (KMB) is a global health and hygiene company

offering household and personal care and consumer tissue products. KMB has a number

of strengths and weaknesses which are represented in the table below.

Table 5
Strengths Weakness
▪ Strong Brand Image ▪ Lack of Scale
▪ Strong Customer Loyalty ▪ High Dependence on Wal-Mart
▪ Broad Portfolio of Products ▪ Lack of International Revenue
▪ Diversified business structure

Kimberly-Clark's product portfolio includes some of the most popular brands of

the world such as GoodNites, Cottonelle, Kleenex, Scott, Andrex, Hakle, Huggies, Pull-


Ups, Kotex, Poise, Kimberly-Clark, Fiesta, Little Swimmers, Andrex, Ballard, Kimwipes,

Lightdays, Page and Depend. KMB has some of the most recognizable products in the

industry that have allowed it to achieve consumer loyalty and over time have ensured a

lofty market share. KMB has a diversified business structure that has been organized into

four reportable global business segments: Personal Care; Consumer Tissue; K-C

Professional & Other; and Health Care. Wal-Mart is KMB largest customers and

accounted for approximately 14 percent in 2008 and 2007, and approximately 13 percent

in 2006 of its net sales and revenue. KMB had approximately $10,461 million, which

was 52.1% of the total revenue coming from the North American region; out of which

$10,143 was from the U.S. alone.

1.5.5 Competitor’s next moves

In an effort to keep pace with a more competitive and ever changing market

Johnson & Johnson has decided to focus on redefining the image of certain products

through marketing drives that are closely integrated with packaging and product design.

The success of many of Johnson & Johnson’s packaging redesign projects is based partly

on the creative imagination of the designers.

Within this new structure today, JNJ also believes that another key focus is on

relationship management. JNJ wants to ensure that all divisions, from R&D to sales,

communicate effectively and collaborate around shared goals. Within a collaborative

environment that functions well, the product is linked to the process of packaging design

at a much earlier stage than ever before. JNJ believes that this bond between product

design and packaging design is crucially important to the future success of any

advertising and/or marketing campaign, because all internal stakeholders have an input

on the final product and the strategy to place it in the market.


KMB main focus is on its growth through acquisitions. KMB in October 2008,

purchased the remaining shares of Colombina Kimberly Colpapel (CKC) from Compañía

Colombiana de Inversiones. This acquisition will enhance KMB’s growth potential in

the rapidly developing markets of Bolivia, Colombia, Ecuador, Peru and Venezuela.

Earlier this year, KMB acquired Jackson Products, a privately held safety products

company. Jackson Products was one of the leading providers of welding safety products,

personal protective equipment and work zone safety products. The acquisition is expected

to bring a wealth of strengths to Kimberly-Clark's professional business, including a

strong product portfolio with an experienced sales force.

Kimberly-Clark will also focus its growth through product innovation. The

company will spend approximately 1.5% of its annual revenue on R&D in an effort to

drive innovative new products to the market. KMB will work more closely with

customers in order to increase shopper loyalty. Finally, in order to further build brand

equity and market share, KMB has decided to increase its marketing spending by $200

million over the last four years and plans to continue increasing its marketing investments

for the foreseeable future.

1.5.6 Competitive advantage of company in relation to the rivals

Procter and Gamble is one of the most admired and industry dominating

companies in the world today. P&G takes great pride in the products they produce and

work hard to ensure that their products are of the highest quality. They strongly believe

in the importance of advertising and research and development. They research intensely

to determine their target markets and what types of products would best fit their needs. In

fact P&G currently spends almost twice as much on R&D spending nearly $2.2 billion in

2008 as its closest competitor. P&G’s advertising and R&D are spread over 44 brands


that account for 90% of the company’s profits. P&G’s research and development is

enhanced by a global relationship with nearly two million researchers in technology areas

connected with P&G businesses. P&G promotes its products to those who most fit their

target market by appealing to the lifestyles that the consumer lives and understanding

what the consumer’s values and morals are. P&G has a long standing reputation of

having a family of products that are of excellent quality and continues to be a leader in

household goods.

1.5.7 Summary of competitor analysis

The household and personal care products industry is a highly competitive,

mature, and stable industry for the market. More times than not, it has not experienced

the major downfalls because of the economy. From the information provided by most

analysts a general conclusion can normally be made about the nature of this industry.

According to most analysts most slips in sales or volume are resulting from current

economical standings; however, these drops are not normally significant enough to affect

an industry that provides products people rely on for everyday living. Generally, when

the market falters it is because of a decrease in the consumers’ purchase of luxury items.

The household and personal care industry offer both types, necessity products which are

normally considered recession proof products and those of luxury.

In order for P&G to maintain its current market position, they must continue to

scan the environment for possible threats. Whether through acquisitions or Greenfield

investments, P&G must start to focus on developing and emerging markets. Rising gas

prices and new regulations will not only impact P&G but its competitors also. Therefore

P&G must work non-stop to ensure that they can continue to put forth a superior quality


of product. P&G has many loyal customers and has to continue to meet their needs while

attracting new customers in order to remain on top of their industry.

2.0.0 Internal Analysis and SWOT Analysis
2.1.0 Financial Analysis

Financial analysis is the use of financial statements to analyze a company’s

financial position and performance, and to assess future financial performance. It reduces

the reliance on hunches, guesses, and intuition for business decisions. Procter and

Gamble and it competitors’ financial statements were obtained from Yahoo Finance,

AOL Money & Finance, and the Securities and Exchange Commission (SEC). The most

recent annual 10-K report from each of the companies was evaluated in order to insure

the accuracy of the information provided.

2.4.1 Valuation Analysis

Financial minds are constantly trying to measure the value of securities (or

businesses). Valuation ratios are mathematical calculations that help individuals assess

and determine the cost of a security (or business) to the benefits of owning it. These

ratios are typically calculated by dividing a measure of price by a measure of value or

vice-versa. For purposes of my analysis, I am applying the following ratios:

Price/earnings ratio, Price to earnings growth ratio, Price/Cash flow ratio, Price/Book

ratio and Dividend yield.

Table 6


Valuation Ratios
PG JNJ KMB Industry
Market Cap 168.28 Billion 167.94 Billion 24.48 Billion 260 Billion
P/E Ratio 16.71 14.14 14.44 16.90
P/E Growth Ratio 1.46 1.65 1.50 N/A
Price/Cash Flow Ratio 11.70 10.70 10.30 12.90
Price/BookRatio 2.69 3.62 5.41 5.82
Dividend Yield 2.51 3.00 4.40 2.9
Source: MSN Money

▪ Price/earnings ratio (P/E): This formula is calculated by dividing the price of

the stock per share by the earnings per share. Although this calculation is simple,

the information is readily available and the ratio is a good valuation method to use

versus peers and for historical purposes.

▪ PEG ratio (Price to earnings growth ratio): This ratio is closely related to the

first ratio, but it is slightly more dynamic and incorporates the estimated growth

of a company. In the PEG ratio the formula uses the price/earnings ratio and then

divides that number by the expected annual earnings per share growth rate. This is

a great valuation method to use when considering whether a stock that is growing

quickly is still a good value or not, but the method is also subject to objective

guesses as to the growth rate.

▪ Price/cash flow ratio: This method measures the ability of a company to

provide cash flow on a per share basis. The ratio is calculated by taking the stock

price per share and dividing that by the operating cash flow per share. A top

reason to use this method is that it typically excludes possible accounting

distortions that other investment ratios might not be able to exclude.


▪ Price/book value ratio: The book value of a company is a nice conservative

valuation method that value investors and more traditional investors love to use.

The price book value ratio is found by taking the stock price per share and

dividing it by the shareholder’s equity per share. Over the years the book value

has lost importance in many circles due to its undervaluing of modern asset types.

▪ Dividend Yield: While not every stock has a dividend, understanding that a

dividend yield is essential in valuing a company is important. An investor can find

the dividend yield of a stock by taking the annual dividend amount per share and

dividing that by the stock price per share. A Dividend yielding stocks are typically

more mature and more value related, as opposed to growth stocks which often

yield nothing or almost nothing.

Valuation Conclusion: Although the P/E ratio is slightly higher than the peer

comparison, the P/E ratio is in line with the industry. Plus, based on the more favorable

P/E growth ratio, cash flow and book ratio, it appears P&G is a more valuable option than

JNJ and KMB; therefore, investors are willing to spend more for an ownership interest in

P&G.

2.4.2 Growth Analysis

Growth ratios or growth rates tell us just how fast a company is growing. The most

important of these growth ratios include:

▪ Sales %: Sales growth is normally stated in terms of a percentage growth from

the prior year. Sales is the term used for operating revenues so it is important to

see the sales growth rate as high as possible.


Figure 6

Sales %

200 6

Kim be rly- Cla rk
200 7 Joh nso n & Joh nso n
Pr octer & G amb le

200 8

0.0% 5.0% 1 0.0% 1 5.0 % 2 0.0 % 2 5.0 %

2008 2007 2006
Procter & Gamble 9.2% 12.1% 20.2%
Johnson & Johnson 4.3% 14.6% 5.6%
Kimberly-Clark 6.3% 9.1% 5.3%
Source: Data and Chart constructed from each company’s 10-K Annual Report

▪ Net Income: Growth in net income is even more important that sales because

net income tells you how much money is left over after all of the operating costs

are subtracted from sales.

Figure 7 Net Income %

2 5.00 %
2 2.40 % 2 1 .6 0%
19 .10 % 1 9.6 0%
2 0.00 %
16 .80 %
1 5.00 %
9.9 0%
1 0.00 % P ro cter & Ga mb le
Jo hn so n & Jo hn son
5.00 % K imb e rly-Cl ar k
0.00 %
2 0 08 2 00 7 2 00 6
-5.00 %
- 4.30 % -4 .40 %
- 7.30 %
-1 0.00 %

2008 2007 2006
Procter & Gamble 16.80% 19.10% 19.60%
Johnson & Johnson 22.40% -4.30% 9.90%
Kimberly-Clark -7.30% 21.60% -4.40%


▪ Dividends: Dividend growth is a good indicator of the financial health of a

company. Some companies do not pay stock dividends at all; rather they use these

excess profits to reinvest money back into the company to hopefully accelerate

growth. One thing we like to see in Dividends (%) is that it does not go negative.

That is, once a dividend rate is established, a company needs to have a very good

reason to decrease the dividend payout.

Figure 8 Dividend Yield %

20 06

Ki mbe rl y-Cla rk
20 07
Joh nso n & Joh nso n
Pr octe r & G am ble

20 08

0.0 0% 0 .0 1% 0 .01 % 0.02 % 0.0 2%

2008 2007 2006
Procter & Gamble 0.01% 0.01% 0.01%
Johnson & Johnson 0.01% 0.01% 0.01%
Kimberly-Clark 0.01% 0.01% 0.01%

Growth Analysis Conclusion: P&G has demonstrated a stronger ability to grow than

JNJ ad KMB. P&G’s sales growth has outpaced their peers and has resulted in strong net

income growth. P&G has been able to grow sales and net income year over year unlike

its peers.

2.4.3 Profitability Analysis


Profitability ratios or profitability margins are a good indicator of how efficient a

company is operating. This is a measure were you would normally compare a company

to its industry as a benchmark rather than the overall stock market since the profitability

of companies can vary greatly by industry.

▪ Gross Margin (%): Sales Revenue less COGS divided by net sales revenue

Figure 9

Gross Profit Margin %

30%
2006 72%
51%

31% K imberly-Clark
2007 71 %
Johnson & Johnson
52%
P rocter & G amble
30 %
2008 71%
51%

0% 10% 20% 30% 40% 50% 6 0% 70% 80%

2008 2007 2006
Procter & Gamble 51% 52% 51%
Johnson & Johnson 71% 71% 72%
Kimberly-Clark 30% 31% 30%

▪ Earnings per Share trending

Figure 10


Earning per Share

$5.00
$4.55 $4.25
$4.50 $4.14 $4.15 $3.76 $3.90
$4.00 $3.64
$3.50 $3.04
$3.00 $2.64 Procter & Gamble
$2.50 Johnson & Johnson
$2.00 Kimberly-Clark
$1.50
$1.00
$0.50
$0.00
2008 2007 2006

2008 2007 2006
Procter & Gamble $3.64 $3.04 $2.64
Johnson & Johnson $4.55 $4.15 $3.76
Kimberly-Clark $4.14 $4.25 $3.90

▪ Net Profit Margin (%): Gross sales revenue less all (not just COGS) expenses

divided by gross revenue. The net profit margin is the ratio of net profits to sales.

This is the best indicator of the company's efficiency in that net profit takes into

consideration all expenses of the company. You want the net profit margin to be

as high as possible.

Figure 11


Net Profit Margin %

25%
21%
20%
20%
17%
14% 14% 13% Procter & Gam ble
15%
10% Johnson & Jo hnson
10% 9% 9%
Kimberly-Cla rk

5%

0%
2008 2007 2006

2008 2007 2006
Procter & Gamble 14% 14% 13%
Johnson & Johnson 20% 17% 21%
Kimberly-Clark 9% 10% 9%

Profitability Conclusion: Although P&G shows solid profitability performance, JNJ

appears to be the benchmark for our comparison. P&G demonstrates a strong gross

margin and healthy net margin. However, both peer comparisons demonstrate stronger

per share performance.

2.1.4 Financial Strength Analysis

▪ Current Ratio: current assets/current liabilities

Figure 12


Current Ratio

1.8
1.65 1.51
1.6
1.4 1.22 1.24 1.22 1.20
1.2 1.05 Procter & Gamble
1
0.79 0.78 Johnson & Johnson
0.8
Kimberly-Clark
0.6
0.4
0.2
0
2008 2007 2006

2008 2007 2006
Procter & Gamble 0.79 0.78 1.22
Johnson & Johnson 1.65 1.51 1.20
Kimberly-Clark 1.22 1.24 1.05

▪ Quick Ratio: cash + net receivables + marketable securities/ current liabilities

Figure 13

Quick Ratio

1.6
1.41
1.4 1.25
1.2
0.90 0.94
1 Procter & Gamble
0.70 0.74
0.8 J ohnson & Johnson
0.56 0.65
0.52 Kimberly-Clark
0.6
0.4
0.2
0
2008 2007 2006

2008 2007 2006

▪ Working capital: Current assets less current liabilities


Figure 14

Working Capital

$15,000,000

$10,000,000

$5,000,000 Procter & Gamble
Johnson & Johnson
$0 Kimberly-Clark
2008 2007 2006
($5,000,000)

($10,000,000)

2008 2007 2006
Procter & Gamble ($6,443,000) ($6,686,000) $4,344,000
Johnson & Johnson $13,525,000 $10,108,000 $3,814,000
Kimberly-Clark $1,061,000 $1,168,000 $253,000

▪ Times interest earned: Net income + interest exp + income tax expense divided

by interest expense

Figure 15

Times -Interes t-Earned

200
175.44
180
160
140
120 Procter & Gamble
100 95.73
J ohnson & Johnson
80 Kimberly-Clark
60
29.77
40
8. 23 5.59 7.93 6.88 7.75 6.81
20
0
2008 2007 2006

2008 2007 2006
Johnson & Johnson 29.77 95.73 175.44


▪ Debt-equity ratio: Total liabilities/ total shareholders equity
Figure 16

Debt-to-Equity Ratio

2 00 6

`
K imb er ly-Cla rk
2 00 7
Jo hn son & Joh n son
P rocte r & G am bl e

2 00 8

0 0 .5 1 1.5 2 2 .5 3 3 .5

2008 2007 2006

▪ Debt-to-Assets Ratio: total liabilities/total assets
Figure 17

Debt-to-Assets Ratio

0.8
0.73 0.66
0.7 0.64
0.6 0.54
0.52 0.50 0.52
0.5 0.46
0.44 Procter & Gamble
0.4 Johnson & Johnson
0.3 Kimberly-Clark
0.2
0.1
0
2008 2007 2006

2008 2007 2006


Financial Strength Conclusion: As an investor, I would like to see P&G work to

become more liquid and slightly more conservative in their use of debt to finance the

organization. JNJ again is the benchmark to compare against. JNJ has a more liquid

balance sheet and has no concern in covering interest owed. Although, P&G is not as

strong as JNJ, P&G is not leveraged as much as KMB.

2.1.5 Dividend Analysis

Figure 18


Dividend Rate and Yield Ratio

5.00%
4.08%
4.00%
3.28%
2.73% Procter & Gamble
3.00% 2.40%
1.76% 1.96%
Johnson & Johnson
2.00% Kimberly-Clark
1.00%

0.00%
Div idend Rate Dividend Yield

Dividend Payout Ratio

70.00%
60. 56 %
60.00%
46 .41 %
50.00%
4 1.7 6%
Proc ter & Gamble
40.00%
Johnson & Johnson
30.00%
Kimberly-Clark
20.00%

10.00%

0.00%
D ividend Payout Ratio

Dividend
Dividend Payout
Dividend Rate Yield Ratio
Procter & Gamble 1.76% 2.73% 46.41%
Johnson & Johnson 1.96% 3.28% 41.76%
Kimberly-Clark 2.40% 4.08% 60.56%
Source: Data and Chart constructed from Key Financials MSN Money and Finance AOL
Dividend Analysis Conclusion: All three companies pay a reasonable dividend yield.

One can assume that since P&G’s yield is lower and growth rate higher than peers (as

identified above) that P&G is investing its earnings back into the organization. KMB


which has a high Debt to Asset ratio is choosing to pay its shareholders rather than fund

its operation. JNJ appears to be a healthy blend between the two.

2.1.6 Management Efficiency Analysis

Figure 19

Management Efficiency

120
100
80 Pro cter & G amble
60 Johnson & Johnson
40 Kim berly-Clark
20
0
Days in Inventory Avg. Return on Return on Return on
In ventory Turnover Collection Equit y (pe r As se ts I nvested
Period share) Ca pital

Return on
Avg. Equity Return Return on
Days in Inventory Collection (per on Invested
Inventory Turnover Period share) Assets Capital
Procter & Gamble 75.48 4.84 38.35 17.62 10.24 13.85
Johnson & Johnson 99.62 3.66 75.29 30.22 15.98 24.68
Kimberly-Clark 67.12 5.44 49.31 37.35 9.82 16.09
Source: Data and Chart constructed from Finance AOL and each company’s 10-K annual report

Management Efficiency Conclusion: Although P&G is not the lagging in all

measurements, they are behind in return on equity. JNJ has a strong return due to the

strength of their operation. KMB has chosen to limit the shares outstanding and finance a

large percentage of the organization; as a result their return on equity is high. P&G is a

solid performer in the middle of the pack and could use its peers to benchmark against.

2.1.7 Stock Price Analysis

According to MorningStar.com Procter & Gamble stock opened at $57.37 on

October 13, 2009. Procter & Gamble’s stock price closed at $57.26. By the end of the


trading day P&G had a volume of 11.28 million shares and a 52wk range is $43.93 to

$66.82 as per figure below.

Figure 20

Source: http://www.wikinvest.com/stock/Procter_%26_Gamble_Company_(PG)/WikiChart

MorningStar.com also reported that Kimberly-Clark’s stock opened at $59.38 on

October 13, 2009. KMB’s stock price closed at $59.01. By the end of the trading day

KMB had a volume of 1.81 million shares and a 52wk range is $43.05 to $62.05 as per

figure below.

Figure 21

Source: http://www.wikinvest.com/stock/Kimberly-Clark_(KMB)/WikiChart?ref=topnav

Johnson & Johnson’s stock price opened at $60.92, on October 13, 2009. JNJ’s

stock price closed at $61.01. By the end of the trading day JNJ had a volume of 23.50

million shares and a 52wk range is $46.25 to $63.01 as per figure below.

Figure 22


Source: http://www.wikinvest.com/stock/JOHNSON_%26_JOHNSON_(JNJ)/WikiChart

Stock Price Analysis: JNJ has the largest market capitalization of the three and appears

to be a more liquid asset (since the trading volume is significantly more). Based on the

analysis performed above, one would expect JNJ to demand a higher stock price and the

other two close behind. Also, based on KMB highly leveraged position, one would

expect its stock price to be more volatile than PG, and based on this one day snap shot,

this hypothesis holds true.

2.1.8 Summary of Financial Analysis

P&G’s stock price in relation to its peers sums up all the financial ratios in

comparison to KMB and JNJ. While PG has certain strong ratios, PG is not an industry

leader. JNJ is the most financially sound of the three companies and KMB has a higher

Owner’s equity return (but are more risky due to leveraging). PG is a solid blend that is

demonstrating strong growth compared to its peers, and appears to be a solid value play

for investors.

2.2.0 Strategic Analysis

Strategic analysis consists of measuring the strengths and weaknesses of a

company's position. There are a number of tools or methods used as the foundation for

strategic analysis of a business. Understanding and analyzing all these factors is crucial

to developing current strengths into competitive advantages over competition and

improving certain weaknesses that hinder a company's efficiency and growth. An

organization's core competencies should be focused on satisfying customer needs or


preferences in order to achieve above average returns. This is done through Business-

level strategies. Business level strategy is an integrated and coordinated set of

commitments and actions a firm uses to gain a competitive advantage by utilizing its core

competencies in specific product markets.

2.2.1 Current Business Level Strategy

P&G is a global manufacturer and marketer of consumer products. The company

markets more than 300 brands in over 180 countries spanning Americas, Europe, the

Middle East and Africa, and Asian region. The company is currently organized into three

separate Global Business Units (GBUs. The three GBUs are: Beauty, Health and Well-

Being, and Household care.

Figure 23


Procter &
Gamble

Health and
Household
Beauty GBU W ell-B eing
Care GBU
GB U

Sn acks, Coffee, Fabric Care and Baby Care and
Beau ty Groo ming H ealth Care
and Pet Care H ome Care Family Care

A riel
H ead &
Braun Acto nel Dawn Bo un ty
Shou ld ers
Fusion Always Iams Down y Charmin
Olay
Gillette Crest Prin gles D uracell Pampers
Pan tene
Wella M ach 3 O ral-B Gain
T id e

Source: Organizational Chart constructed from P&G’s 10-K annual report

2.2.2 Elements of Company’s Strategy

P&G new CEO Bob McDonald, who assumed office in July, has laid out P&G

new company strategy which will be centered on company values and a sense of purpose.

McDonald said that P&G will “focus on touching and improving more consumers' lives

in more parts of the world... more completely."

McDonald calls P&G's purpose the most consistent factor in a 171-year history of

the company. He said P&G will continue to provide branded products of superior quality


and value that improve the lives of the world's consumers, now and for generations to

come. He believes that as a result of P&G’s new company strategy will cause consumers

to reward P&G with leadership sales, profit and value creations, and “allowing our

people, our shareholders, and the communities in which we live and work to prosper."

(Kanter, 2009)

2.2.3 Components of Company’s Business Level Strategy

Efforts to build competitive advantage

In an effort to continue its global leadership position and create an additional

competitive advantage, P&G has partnered with Cisco System to help develop its next

phase in supply chain management “Smart Packaging”.

“Smart Packaging,” is a highly innovative system that will enable the company to

look at its supply chain from a consumer’s perspective. Smart Packaging will embed a

chip into every item in the store, providing more information than today's standard

barcodes. By creating an easy way to track products through the factory, on delivery

trucks, and in the stores, this innovation will dramatically increase supply chain

efficiency. Smart-chip technology will result in fewer out-of-stocks, greater on-time

delivery, better products, and an enhanced user experience for consumers (Procter &

Gamble, 2002).

Collaborative partnerships and strategic alliance

P&G will outsource its worldwide print operations to Xerox. This collaborative

partnership with Xerox will allow P&G to reduce operational costs by an estimated 20-25

percent. The five-year services contract calls for Xerox to manage P&G's print shops,

offices and home-based work settings. Working with Xerox, P&G has the opportunity to

deliver substantial sustainability benefits in addition to cost savings and increased user


satisfaction and reliability. P&G predicts it will reduce print-related power usage by 30

percent and paper consumption by 20-30 percent annually. (Xerox.com)

Distribution

P&G is currently working with i2 Technologies to support the physical

distribution of its North American operations. Utilizing the i2 Freight Matrix

transportation solution, P&G is working to drive efficiency across its finished product

logistics through improved carrier selection, event management and dashboard reporting.

Human Resource Strategy

Procter and Gamble view their more than 138,000 employees as the most important

asset of the company and encourage them to have the same values and principles as the

company. All employees of Procter and Gamble are considered leaders and encouraged

to take responsibility to do the best that they can while meeting business needs, bettering

the system and helping those around them (PG.com). According to P&G’s 2009 Annual

Report, its human resource strategy is built of five core values:

I. Hire the Best

P&G claim that almost 500,000 people apply for P&G jobs every year and that they
normally only hire less than 1% of those applicants. P&G believes that it attracts top
talent because of its reputation as a great company for current and future leaders

II. Challenge P&G People from Day One

P&G has learned that “there’s no substitute for hands-on experience when it comes to
leadership development.” To help develop this leadership P&G has created
consequential responsibilities for every employee. Its assignments typically demand
collaboration inside and outside the Company, disciplined project management and
the need to be in touch with consumers, retail customers and other external
stakeholders.

III. Business and Functional Leaders Actively Recruit, Teach and Coach

At P&G, leadership by example starts from the top. P&G’s Chairman of the Board
and former CEO A.G. Lafley, Corporate Officers, Presidents and Functional Officers
recruit on college campuses and teach in their executive education programs. These


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