BUS202 Principles of Finance

Questions:

1.Procter and Gamble Company enjoy goodwill in the market and has a diversified portfolio in order to reach more and more customers. The current situation in P&G is that it is considering re-investment in one of its products called Crest Whitestrips. This is because in the year of launching the product Crest Whitestrips resulted in $300 million in annual sales but after that there was no growth in terms of profits or sales in the following financial years to come. The commercial team of the company was of the opinion that the product needed a fundamental change in order to win back the merchandising support and trust. Therefore a new technology had been planned to introduce in the product named Advanced Seal which would prevent the strips from slipping out of the position during use.

2.The particular recommendation in this case would be that the price of the new technology that the management of the firm is trying to introduce the, Advanced Seal should be such that it offsets the cost or expenditure that is incurred by the company in manufacturing the product. Though according to a member of the management the prices of the new technology cannot be fixed high enough in order to offset the costs but surely the new product will attract new users who will offset profit dilution from the cost structure. Another major criterion that is to be kept in mind is that the decision regarding implementation of the technology should be such that the investors also get something out of the project and be happy about the decision taken by the management.

3.The expected cash flow from the Advanced Seal was based on the assumption that the expected price point for the retailers would be $22 and the cost incurred in producing such a product would be $5 more that the cost of producing a premium product thus ensuring gross profit incurred from Advanced Seal to be less than that incurred from a premium product. The forecasting model also assumed an initial production of 2 million units of Advanced Seal assuming that the cannibalization rate would be so high that the two million units would come out of the already existing P&G sales. Another assumption that was made was regarding the life of the project which was estimated to be four years over the period of which the total unit sales were assumed to be constant. The base assumption that was made in order to reach such a decision was that the discount rate was estimated to be 8% and the tax rate to be 40%.  

4.The proposal to drive revenue as proposed by Whitman has to be further analyzed and the numbers that are estimated should be real figures. The forecasting model used to figure out those values should have a strong base. Whitman proposes that digital campaigns for launching the new product would be hugely popular therefore the driving trial would be a huge success.

But the major problem that lies in Whitman’s plan is that it involves an initial cost in advertising of $7.5 million which exceeds the previous plan of $6 million. The only reason why Whitman’s proposal can be considered is that a small drop in price could boos t the sales. Therefore if the proposal works then the company could definitely benefit from it (Johnston & Bate, 2013).

5.The proposal by Tam to minimize the cannibalization prioritizes the cannibalization more than the trial. Though the plan apparently is accurate and very efficiently targets the untapped customers thus reducing the cost of advertisement by following the traditional and cheaper methods, the primary aim of the trial is not fulfilled. This means that the aim of the trial is capturing more and more customers but here more priority is given to the concept of cannibalization. Following this plan will not only result in losing the potential customer base but also will result in the business entering into an unknown zone where the entire future of the new technology depends on how the brand new group of customers react (Payaud, 2014).

6.P&G should arrive at a more balanced solution. This means that the rate of cannibalization should be decreased and also necessary focus should be given on driving the trial. Therefore a particular recommendation for such a situation would be that both the untapped and the known customers should be targeted for the trial for the first year and then decision should be taken accordingly.

References

Johnston, R. E., & Bate, J. D. (2013). The power of strategy innovation: a new way of linking creativity and strategic planning to discover great business opportunities. AMACOM Div American Mgmt Assn.

Payaud, M. A. (2014). Marketing strategies at the bottom of the pyramid: Examples from Nestle, Danone, and Procter & Gamble. Global Business and Organizational Excellence, 33(2), 51-63.