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BUS 640 Financial Principles and Practice

Published : 17-Sep,2021  |  Views : 10

Question:

Describe the company and provide a brief history of its operations. Find or use graphs to illustrate its financial performance over the years.

Describe any sources of risk or uncertainty in its operations. Do the financial reports indicate risky or uncertain activities or changes to the economic environment that ultimately appear to have affected the company financial outcomes? Be specific.

Are there any government regulations that have affected this company operations domestically or abroad? Explain.

Describe the inputs that are used in this company production function and identify any challenges to securing these inputs.

Determine if the company has introduced new products in existing markets or created new markets over time. What is the impact on its finances?

Determine if the price of its products increased or declined over time and analyze the reasons for price fluctuations. Study the demand elasticity for its products and discuss the availability of close substitutes for its products. How does that affect pricing decisions?

Analyze the company  profitability. Identify the economy or industry influences on its costs, operations, and profitability.

Describe the competitive environment in which the firm operates, the distribution of market power, and the strategic behavior of the firm and its competitors. Apply your knowledge of the theory of this company’s market structure. How does the company make pricing and production decisions? Is your observation supported by the theoretical models? Refer to the financial reports for illustration.

Describe any non-price competitive strategies that the company might be engaging in. Provide specific examples.

Answer:

Introduction 

Founded in 1837, Procter & Gamble (P & G) is recognized as the largest distributor and producer in the world for the personal and household products. P & G deals in three global business unit, they are – household care, health and well-being and beauty products. They operate in more than 80 countries and provide the services and products to over than 180 countries throughout the globe and they have a presence of strong global market. This report will give a overview on the operation of the company. It will further describe the risk associated with their operations, impact of government’s regulation over the company, inputs used for the production of the company, elasticity of demand, company’s profitability and its competitive environment and the non-price competitive strategies (Home, 2017).

Overview 

P & G focussed on the development of the understanding of the consumers, techniques of brand-building and the marketing. They manages at least 23 brands that generate more than $1 billion individually from annual sales and at least 20 brands that generate 0.5 billion individually from annual sales. Further, at least 12 billion-dollar brands of the company are at number 1 position with regard to the global market share in the respective categories of product.

Their revenue was accounted for $ 65,299 million for the year 2016 and the gross profits were accounted as $ 32,390 million, whereas the operating income of the company during that period was $13,441 million.

Risks associated with the operation

The emerging disciplines of P & G reveal the overall risk that enables the diverse stakeholders for analysing the tradeoffs among the cost, reliability and safety. Various risks associated with the operation of P & G are as follows –:

Credit risk: it arises from the incapability of the counterparty for meeting the terms of their contracts related to the financial instrument that are limited by the amounts and through which the obligation of the counterparty exceeds the obligation to counterparty.

Management of interest rate: it depends on the sensitivity of their prices to the changes of interest rate in the market place. Their policy is to manage the cost of interest through the variable-rate debt and fixed rate. However, to manage the risk of interest rate, they swaps to exchange with counterparty at regular intervals and the difference among the variable and fixed interest are calculated by the reference of the notional principal amount that are agreed-upon (Robles et al., 2015).

Foreign currency management: as they sell their products all over the world, there is always the inherent risk of exposure to the foreign currency risk due to the changes in the exchange rate. However, to manage the risk, they utilize the options and forward contracts with the maturities of less than the period of 18 months and the currency swaps with maturities of up-to 5 years.

In their financial report, the amount of gain or loss from hedge are reported under the income statement of the company from which the risk associated with the foreign currency management can be assessed to a certain extent. Other risk associated with the operation of the company that are mentioned in their annual reports are –

  • Alteration in the laws related to tax and the interpretation of these laws
  • Sudden alterations in the exchange control of the foreign currency
  • Conflicting and discriminatory fiscal policies
  • Longer cycles of collection and higher risk associated with the uncollectible accounts.
  • Immediate and effective development for the control of environmental process all over the places of their operation.

Effect of government regulation on operation of the company

The employees of P & G from all over the world are directed and expected to abide by all the laws and the regulations of the government of the respective countries. Moreover, the employees are responsible for understanding the policy and legal requirement while they apply for the job and shall notify the management if they feel that the laws or the policies are violated.  As the industry for consumer’s product are highly competitive, there is various competitive pressures in the operation environment. Further, the new environmental policies of the government that are frequently adopted make it challenging for the company as non-compliance of these new policies negatively impact on the operation of the company.

Inputs used for the production of the company

Almost all the packaging and raw material used by P & G are purchased from various other sources, out of which some are purchased from the single source suppliers. They produce the raw material, mainly the chemicals for further use of manufacturing process. Apart from this, the derivative products, natural gas, fuel and other crucial commodities are consumed for further process of manufacturing and distribution of the finished products and raw materials to the consumers. However, the raw materials and various other commodities they use in the production process are exposed to the fluctuation. When there is a change in price for these items, the changes may or may not be passed to the consumers, based on the expected duration and magnitude of the change (Gouillart, 2014). Further, if the company is not able to procure the required raw material due to non-availability, they purchase the substitute variety of other packaging and raw material from the suppliers to meet the production process deadline.

Introduction of new product over new market or existing market

The business model of P & G depends on the continuous success and growth of the existing products and brands and creation of the new products at the same time. The industry and market segments where they deliver their products are highly competitive. They sold their products over 180 countries around the globe through departmental stores, grocery stores, drug stores, neighbourhood stores, salons, mass merchandise and the high-frequency stores to the developing markets. They collaboratively work with the customers to improve the presence of the in-store with the products and win ‘first moment of the truth’ while a consumer shops with the store of the company. They also believe in winning the ‘second moment of truth’ while the customer uses the products of the company and analyse how the product meets with the expectation of the customers. The company believe that they shall continue to deliver innovative and new brandings and products to the customers to grow their business.

The activities related to developments of products and researches are designed to enable the company to have sustainable growth for the current and future years.  Sales to the Wal-Mart stores and its subsidiaries accounts for approximately 15% of their total revenue during 2014, 2015 and 2016. Further, their top ten customers represents for about 35% of their total sales in 2014, 2015 and 2016.

Pricing trends of the product and the reasons of price fluctuation

The product prices of the company are subjected to fluctuations, specifically with regard to the alterations in the commodity prices and the prices of raw materials and the associated costs of the healthcare, pensions, labour, energy and transportation.  Thus, the outcome of the business are dependent upon the continued ability to supervise the fluctuations through the projects related to savings of cost, pricing actions and the decisions associated with sourcing and improving and maintaining the market share and margins at the same time. Failure of managing the fluctuations has adverse impact on the financial results of the company.

Demand elasticity 

P & G is the global leader in the FMCG sector. It delivers branded goods with superior value and quality to their customers all over the world. The customers are the king of the market. The changing g behaviour of the customers, habits, rising populations and trends directed to the growth of consumer staple sector (XLP). Rising income of the people have impact on the willingness of the customers for spending towards prestigious brands which in turn lead to highly competitive market for the company. Staples are tending to experience low price elasticity for the demand. That means, the fluctuation in price do not have any impact on demand of these products (Douglas, 2012). However, like any other company, P & G has to revise their pricing strategies regularly to face the shifting and declining demand of the consumer for various products.

Analysis of profitability

The net sales of the company for the year 2014, 2015 and 2016 are $ 74,401 million, $ 70,749 million and & $ 65,299 million respectively. Gross profit of the company was $ 35,371 million, $ 33,693 million and $ 32,390 million respectively for 2014, 2015 and 2016. Further, the net earnings for the company were $ 11,643 million, $ 7,036 million and $ 10,508 million respectively for 2014, 2015 and 2016 respectively. Thus, it is recognized that the net earning margin of the company is 14.3%, 11.7% and 15.4% respectively for 2014, 2015 and 2016 respectively. Therefore, the sales margin of the company reduced from 2014 to 2015. However, they were able to increase the margin to 15.4% during 2016.

The reduction in profit during 2015 was due to the loss from the discontinued operations of the company. However, the business of the company has negative impact through the decreased demand owing to the one or more considerable global, regional or local economic disruptions, for instance, slow-down of general economy, reduced growth rates of the market, tight credit markets for the customers, suppliers or vendors or inability of conducting daily transaction through the financial intermediaries.

Theories of the companies market structure

The theory applied to the company is the perfect competition market. The perfect competition theory applies to the industry where there are many firms and the entry to the market is free with homogeneous product and normal profit.

The price of the company’s product under perfect competition is determined by interaction of demand and supply, that lead to price that is Pe. Each firm can maximise the output where MR = MC at Q1. However, in the long run the firms will make the normal profit.

Non-price competitive strategies of the company

The non-price competition of the marketing strategy includes the promotional expenditures like sales promotion, sales staff, free gifts, advertising and coupons.

Procter & Gamble Co. (P & G) is one of the major players in global household consumer goods market that is currently an oligopoly. Its matching products always priced at vertically identical price. They focus on the promotions, competitions, various packaging, special offers, presentations and advertising for making their brands and goods stand out in the market.

Recommendation 

From the above analysis, it can be recommended that the company shall focus in providing best quality products to their customers, which in turn will enable them to generate higher income.  Further, they shall use the innovative technology for production processes to provide better products to the customers. As the company belongs to highly competitive market, they shall offer the products with competitive price to achieve the target sales, value and profits. Further, as the employees are the most important assets of the company, the employees shall be encouraged to have the same value and the principles as same as of the company. Having a robust strategy for the employees will enable the company to look and monitor the employee’s activities closely. Further, owing to the particular niche of the industry, this market is required to be exploited further. Though the results may take considerable time to manifest themselves to generate significant amount of revenue, it will enable the company to achieve long-term sustainable growth. For instance, if the idea for shaving kit is developed, the managers from Gillette shall be in charge of the product, which will not require development of new division of Gillette or Procter and gamble.

References 

Douglas, E. J. (2012). Managerial Economics. San Diego, CA: Bridgepoint Education

Home. (2017). Us.pg.com. Retrieved 17 June 2017, from http://us.pg.com/

Gouillart, F. (2014). The race to implement co-creation of value with stakeholders: five approaches to competitive advantage.Strategy & Leadership,42(1), 2-8.

Robles, M. A., Westring, B. D., Edwards, A. M. W., & Page, M. J. (2015). U.S. Patent No. D731,644. Washington, DC: U.S. Patent and Trademark Office.

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