Project – 3rd Semester, 2012

Title of the project: Maintain the leadership in China

By Group 3, Class 2009 International Marketing

Hand-in date: October 24th, 2012

Team members: Dong Yunyu, Quan Jinping, Su Li, Shen Si, Li

Changhua

Counselor: Sun Na

The number of characters used in the report: 34,907. College of Humanities & Sciences of Northeast Normal University Niels Brock Copenhagen Business College Preface To begin with, thank you for reading the report. The report is finished by Dong Yunyu, Su Li, Shen Si, Quan Jinping and Li Changhua. And the report deadline is on October 24th, 2012. Our purpose of writing this paper is using our knowledge and theories to analyze and make recommendations to P&G Company in China. We devoted ourselves into collecting information, writing and discussing for three weeks. And the report is made in library. Our paper is working on maintaining the leadership in Chinese market for P&G Company. We have applied some theories like marketing mix, value chain analysis and benchmarking to analyze. Simultaneously, we came up with some suggestions to help maintain the leadership in Chine about P&G Company. The report is intended for teacher Sun Na, teacher Gitte Top and also some executives of P&G. Last but not the least, we want to show our sincere appreciation to teacher Sun Na and teacher Gitte Top. Thanks for your help during our writing process. Also, we want to thank librarians, who provide us with some reference books about P&G Company.

I Executive summary The paper is about P&G Company, which is the world’s largest consumer goods company. Its main business is to offer products include foods, beverages, cleaning agents and personal care products. According to the analysis of P&G’s internal environment, some problems are found. Firstly, because of the decentralization in organization structure, it is difficult for departments to move forward with the same goal. Secondly, the quality control system is still not so good, which can be seen from the accident of SK-II’s heavy mental problem. Thirdly, some disadvantages of P&G’s multi-brands are discovered (e.g. P&G will have less resource to support its strong brand.). Fourthly, the pricing strategy should be adjusted. Besides, some retailers complained that P&G’s products are too expensive to promote and they always occupied many shelves. What’s more, the advertising cost is too high. Apart from those problems, others are also listed in the paper. After finding problems, in order to remain the leadership in the Chinese market, some recommendations are given accordingly. First of all, P&G can merge some departments to solve the problems caused by the decentralization. Secondly, P&G should enlarge the sample size when examining products to ensure the quality and safety. Thirdly, P&G could cut two or three brands which ranks last in sales and transfer that resource to develop strong brands. Fourthly, adopt market skimming in the introduction stage and value-pricing strategy in the maturity stage. Besides, P&G could design and develop more lower-end products or give more rewards to those retailers who reach the sales target. What’s more, decrease the advertising cost can be doing TV advertising on the basis of the Forgetting Curve. Other recommendations are put forward to solve other problems.

II 1.0 Introduction...... - 1 - 1.1 Background...... - 1 - 1.2 Research Question...... - 1 - 1.3 Demarcations...... - 1 - 2.0 Methodology...... - 1 - 2.1 Date sources...... - 1 - 2.2 Theories applied and limitations...... - 1 - 3.0 Analysis...... - 2 - 3.1 Internal environment...... - 2 - 3.1.1 Company profile...... - 2 - 3.1.2 Traditional value chain of P&G:...... - 2 - 3.1.3 Virtual value chain of P&G:...... - 10 - 3.1.4 Financial analysis...... - 12 - 3.2 External environments...... - 13 - 3.2.1 Political environment...... - 13 - 3.2.2 Economics environment...... - 14 - 3.2.3 Social environment...... - 14 - 3.2.4 Technological environments...... - 15 - 3.2.5 Competitive environment...... - 15 - 3.2.6 Buying behavior analysis...... - 16 - 4.0 Recommendations and Evaluations...... - 18 - 5.0 Conclusions...... - 19 - 6.0 Bibliography...... i 7.0 Assessment and evaluation of the project process for the group as a whole...... ii 1.0 Introduction 1.1 Background The Procter & Gamble Company (P&G) is an American multinational consumer goods company headquartered in downtown Cincinnati, Ohio, USA. Its products include foods, beverages, cleaning agents and personal care products. In 2011, P&G recorded $82.6 billion dollars in sales. Nowadays, it operates in more than 160 countries all over the world, among which China is one of the most important markets. According to the research in 2010, Chinese consumer goods’ sales volume has exceeded 200,000 million RMB, being the second largest consumer goods’ consuming country in the world. However, from Table 1, it shows that the market share gap between L'Oréal and P&G is becoming smaller. In order to maintain the first place, it is necessary for P&G to take actions immediately. Table 1: Market share in Chinese market. 2008 2009 2010 2011 P&G 17.9% 19.0% 11.4% 16.0% L'Oréal 9.0% 11.7% 8.0% 14.0% Unilever 4.8% 4.9% - - SHISEIDO 4.6% 4.9% - - Amway 4.3% 4.2% - - Data sources: Euro monitors and Google .com.hk As the world’s largest consumer goods company, there are so many products spread throughout the Chinese market, e.g. OLAY, SK-II, Safeguard, etc. However, through our research, we find that L'Oréal is competing strongly with P&G. In order to keep the first place, we would like to give some practical suggestions after analyzing P&G and the whole market. 1.2 Research Question By analyzing the Proctor & Gamble (P&G) internally and externally, how can Proctor & Gamble maintain its leadership in China? 1.3 Demarcations Why do we choose Chinese market as the target market? ①Although China is a developing country, its economy grows very fast. Chinese GDP has exceeded Japan in 2010, ranking the second place in the world. Thus, China is a very promising market. ②According to the research, in addition to the American market, Chinese market has been the second largest market of P&G. 2.0 Methodology 2.1 Date sources Only secondary data is used by searching the Internet (Google, Wikipedia, Baidu, etc.). Some useful data were collected from related books and textbooks. The information is about the history of P&G, P&G’s products, prices, the distribution channels, promotions and market strategies, and some external information of P&G, etc. These secondary data makes a better understanding of the overall situation of P&G, which also helps to find some problems. On the basis of such information, some practical recommendations are made. 2.2 Theories applied and limitations 1) Marketing mix

- 1 - Marketing Mix is the combination of four elements, called the 4Ps (Product, Price, Promotion and Place), they are used to analyze P&G’s product, price promotion and distribution channels. With those analyzing, the main information of P&G can be seen clearly. 2) Value chain analysis The value chain can be used to diagnose and create competitive advantages on both cost and differentiation. The model is used to analyze the internal environment of P&G, which includes human resource management, firm infrastructure, inbound logistics and so on. According to the analysis, problems are found and some recommendations are listed to solve these problems. 3) Benchmarking Benchmarking is the process of comparing one's business processes and performance metrics to industry bests or best practices from other industries. The paper uses this theory to analyze Customers' buying criteria and the reality that P&G has done. From the analysis, P&G’s weakest part is found and some practical suggestions are given to deal with it. 3.0 Analysis 3.1 Internal environment 3.1.1 Company profile The Procter & Gamble Company (PG) is a global consumer products maker. The company operates in three segments: Beauty and Grooming, Health and Well-Being, and Household Care. Its famous products include Bounce, Cascade, Downy, Ivory, etc. In 2011, P&G recorded $82.6 billion dollars in sales. Fortune magazine ranked P&G at fifth place of the "World's Most Admired Companies" list, which was up from sixth place in 2010. 3.1.2 Traditional value chain of P&G:

Figure 1: Traditional value chain Data source: Book called Global marketing Support activities � Firm infrastructure

- 2 - President

CFO

Control

Treasurer

CIO

Legal secruity

Diversity and services

Design

External relations

Grooming and shave care

Oral care

Hair care and color

Beauty, skin and cosmetics

Product supply

Human resource

Corporate

Global business units

Baby care

Home care

New business creation

Family care

Duracell

Wal-Mart

Health care

Feminine care

Pet care

Prestige

Customer development

Brand building

Operations

Asia and specialty channel

Greator China

Latin America and global club

Discounter and pharmacy channel

Eastern European channel

NA&hyper, super and mass channel

- 3 - All departments are under the president. However, AGLafley, the president of P&G, is not hooked on centralization. Basically, they have self rule system. But, each department has certain responsibility for the company. There are some advantages of decentralization of authority. For example, departments can have their own rules and creativity, and get support from P&G. Problems: On the other hand, disadvantages also exist. For instance, it is difficult for departments to move forward with the same goal. And because of the parallel hierarchy, there can be some conflicting views and more coordination cost. What’s more, they would even competing status, interest, and budgets etc. Recommendations: P&G could merge some departments. For instance, make Hair care and Shin & Cosmetics Department consolidated and form a single department. Because they all belong to beauty segment. In this way, employees become more cooperative, management more effective and lower cost. � Human resource management P&G has more than 110,000 employees all over the global and offers the world’s first class welfare to employees. It is P&G that firstly established the profit sharing system. In October 2008, P&G was named one of "Canada's Top 100 Employers" by Media corps Canada Inc., and was featured in Maclean's newsmagazine. Later that month, P&G was also named one of Greater Toronto's Top Employers, which was announced by the Toronto Star newspaper. Table 2: Human resource management in detail Recruitment Training Incentives to keep staff P&G prefers college P&G established training colleges in On material: promotion and increasing the students with relatively headquarter as well as other areas. Every salary. Besides, a simulated share system, which high personalities. And employee will accept an individualistic is given to some excellent employees. After the recruiting process development planning and according to several years, those employees can get the value includes three steps, an their performance in the training, they added part. interview, a written will be given the most suitable position in On psychological: people from superior always examination and a second P&G. The aim of the training is to communicate with subordinates and help them to examination. discover employees’ potential talent solve problems. Superiors respect subordinates a and make full use of it. lot. When they do a good job, superiors write thanks letter to subordinates. Data sources: Books called Unique P&G, Unilever & P&G. After having excellent staff in P&G, some evaluation system is carried to ensure the performance of employees. W&DP evaluation system is used in P&G Company. It is an abbreviation of Work&Development Plan. During the W&DP process, SAW (Success Actions for Winning) is the most important index, which includes leadership, capacity, risk-taking, innovation, etc. Employee with the highest scores will be recognized as the most potential worker. It is difficult for a company to manage more than 110,000 employees. Thanks to P&G’s successful human resource management, it helps a lot to consolidate P&G’s leadership in Chinese market. � Technology development P&G has already established several technical centers. Take the Newcastle Technical Center (NTC) as an example. The Newcastle Technical Centre (NTC) is a Global centre of excellence in laundry and automatic dishwashing product development. Most products developed on site are for the global market and are either powder based or support new innovations in new product categories. The Site researches the chemistry of surface

- 4 - active ingredients, sequestrates and bleaches, whilst powder processing, mixing, agglomeration and spray drying are key areas of process technology. The site also houses the Company's largest pilot spray drying tower. On 19th August 2010, P&G has invested $80 million to establish a Science and Technology Center in Beijing. In China, Chinese government is developing tax incentive system for native companies to encourage them to develop new technique. So P&G could cooperate with those Chinese native companies, being a joint venture is one way. Thus, they can share techniques as well as the tax incentive. Besides, if P&G Company wants to remain its leadership in China, the current R&D Department needs strengthen further, which includes capable employees, budget and more attention. Primary activities � Inbound logistics (1)In October 17th 2008, P&G has launched a sustainability scorecard and rating process to measure the environmental performance of its key suppliers. The new scorecard will assess P&G suppliers’ environmental footprint by measuring energy use, water use, waste disposal and greenhouse gas emissions on a year-to-year basis. Table 3: P&G's Annual Supplier Sustainability Performance Rating Criteria

Data sources: google.cn The scorecard is specifically designed to focus on, and encourage, year-on-year improvement – regardless of a supplier’s total size or the current stage of its sustainability program. On the other hand, this process would cost a lot of money. Because P&G will have to recruit special employees collect information and invite experts to analyze it. Then, they get the rating result. Regardless of it, P&G gets more benefits than cost. (2)P&G makes full use of global technology network to share professional knowledge, systems and skills with suppliers. In this way, P&G reduces a lot of operation cost, being able to offer lower prices to customers with superior products. Every product at P&G requires myriad materials, obtained from hundreds of different sources worldwide. During the process, OR (operation research) techniques is used to analyze which source is optimal for every product. In addition, out of the service and quality considerations, P&G also measure whether a manufacture really has the capability to deliver the materials at the

- 5 - quoted price. Nevertheless, this process is always time-consuming and cost-ineffective. � Operations P&G has ground operations in 86 countries. With products constantly crossing national borders, P&G is exposed to considerable exchange rate risk, where margins can be squeezed by the tiniest movements in currency. Wegryn’s group taps into software that helps predict optimal exchange rates and allows plant managers to shift production accordingly. Let’s say there’s one plant in the US and one in Europe, based on the exchange rate, P&G will adjust where they are manufacturing and sourcing product from. It’s not a massive adjustment, but just a slight adjustment to minimize exchange exposure and maximize the profit, ultimately, for the business.” During the production, some quality control systems are applied, such as GMP and SOP. A good manufacturing practice (GMP) is a production and testing practice that helps to ensure a quality product. On the other hand, standard operating procedure (SOP) could imply that there is a one (standard) procedure to be used across all units. In addition to those quality systems, technician work teams are responsible for keeping production flowing for meeting performance goals and for maintaining the high level of quality that consumers expect from our products. Problems: P&G has combined quality control systems and technician work teams to guarantee the quality of its products. However, events like SK-II's "heavy metal" cosmetics problem also happened unexpectedly. In 2006, SK-II was found with excessive heavy metal, chromium and neodymium, which can do harm to human shin and eyes. It reveals that the sample size chose during the products examination can be relatively small. Recommendations: To avoid such quality problems, P&G should collect more samples when doing products examination. � Outbound logistics Set logistics centers. P&G has established 7 logistics centers in the United States and carried out the Stream lined logistics initiative plan. According to the plan, P&G would focus on the ordering facts of supermarkets and delivery three times a day instead of one time. The plan is not only beneficial to big retailers like Wal-Mart, but also to most medium and small retailers. Cooperate with two logistics service providers. In 2011, P&G worked with two logistics service providers to set up one “tower” for Central and Eastern Europe and another for Africa and the Middle East. The control towers were established to manage the flow of product to the distributors that sell P&G's products in those regions. The concept has produced enough savings in distribution costs that the control towers have paid for themselves. By establishing its own logistics centers, P&G could connect directly with distributors. Therefore, it can collect more products information accurately and timely. And by cooperating with third part logistics providers, P&G could take advantage of their technology. Recommendation: Cooperate with Chinese logistics providers. Because of Chinese vast territory, fast delivery is essential to remain P&G’s leader position in China. � Marketing and sales This marketing part will be analyzed in 4Ps. Products and prices Table 4: Products and prices of P&G Product Position Prices Beauty Upper class, e.g. SK-II ¥50~¥500 Middle-low class, e.g. OLAY, Rejoice

- 6 - Grooming Upper class, e.g. Braun ¥9.9~¥2,000 Middle-low class, e.g. Gillette Health care Middle-low class, e.g. Vicks®, Pepto® and Thermacare® ¥30~¥68.7 Snacks & Pet Care Middle-low class, e.g. Pringles® 100 Calorie Packs. ¥8~¥26.80

Fabric Care & Home Care Middle-low class, e.g. Bounce®, Downy® Around¥50 Baby Care & Family Care Middle-low class, e.g. Old Spice® ¥25~¥88 Data sources: http://blog.sina.com.cn/s/blog_473d524d0100r2oq.html P&G has 18 Research and Development centers with more than 8,300 research workers all over the world. P&G established a world technological website for them to share the latest technology and successful experience so as to develop more innovative products. Besides, P&G claims that the best strategy is attacking itself by itself. Thus, multi-brand is one of P&G’s strategies. Because it is a competition economy, P&G would be more willing to carve up the market share by itself rather than by its opponents. P&G regards it as a way to consolidate the leadership in the market. Problems: Although P&G take it as a way to carve up more market share, multi-brand strategy has some drawbacks. Because of this strategy, P&G has less resource to support its strong brand as developing new products needs heavy investment. Recommendations: (1) Cut two or three brands which ranks last in sales and transfer that resource, including money and labor, to support profitable brands, e.g. OLAY. (2)As for the pricing strategy, from Table 3, P&G has low, middle and upper prices, which can help P&G to gain more market share in Chinese market. But actually, P&G adopts value-pricing strategy. The strategy is to sell the high value product or service at a low, value price. Problems: (1) In April 2011, P&G was fined 211.2m Euros by the European Commission for establishing a price-fixing cartel in Europe along with Unilever, who was fined 104m Euros. Though the fine was set higher at first, it was discounted by 10% after P&G and Unilever admitted running the cartel. (2) For value-pricing strategy, the risk is relatively high. Because the strategy is not calculated based on the cost and profits. There is a possibility that P&G can make a loss. Recommendations: (1) When a new product enters the market, market skimming can be used. That is setting relatively high price to have early cash recovery. And a high price is seen as an indicator of high quality. Because of the curiosity, customers would like to try the new products. At the maturity stage, value-pricing strategy can be used to attract more customers. (2) Do not try to apply price-fixing cartel again. Because once it is uncovered, the brand image will be influenced a lot and the products reliability will also decrease sharply. Distribution channels P&G has direct selling and indirect selling. And it is P&G that firstly established the Pyramid distribution system. 1 Direct selling P&G Subsidiaries (e.g. P&G China) Customers P&G E-commerce (e.g. Tide.com) Customers

- 7 - Subsidiaries: P&G has subsidiaries in over 80 countries. Take China as an example, in 1988, P&G established its first subsidiary in Guangzhou. Then, more subsidiaries were founded in Beijing, Shanghai, Chengdu, Tianjin, Dongguan, Nanping, etc. E-commerce: As far as it is concerned, P&G has established more than 100 websites over the world. P&G established those websites for different objectives. Some of them offer selling service. For instance, customers could purchase Pampers and Febreze on MoreThanACard.com; buy beauty products on Reflect.com. Among all of these websites, however, Reflect.com plays the most important role on line selling. ② Indirect selling P&G Agents (e.g. Aoji Trade Corporation in Dongguan) Customers P&G Wholesalers (e.g. Tianwei Consumer Goods Corporation) Customers P&G Retailers (e.g. Wal-Mart) Customers Agents: P&G would find an agent in every sate cities when entering a new country. Then, the state agent distribute to lower level cities, forming Pyramid Distribution. By Pyramid Distribution, P&G could acknowledge the whole terminal retailers and wholesalers. Retailers: in addition to P&G, its Hong Kong retailers and Wal-Mart has adopted VIM (Vendor Managed Inventory) system. The VIM system makes the retailers’ supply management into a scientific and effective track, greatly saving labor intensity, raising efficiency and reducing operation cost. Besides, P&G has some other policies to cooperate well with retailers. Table 5: P&G with retailers To establish the relationship To manage retailers P&G sends talents to help retailers of distributing the If it is not retailer’s responsibility for not finishing products and their wage are paid by P&G. the sales target given by P&G, P&G will allocate Establish inner communicating platform. Every some money to help. Otherwise, decrease the retailers can connect with headquarter and read the discounts or shorten the payback recycle. More latest news, put up suggestions, requirements and even seriously, impose a fine, even cancel the pour their woes. In addition, retailers could relationship. communicate with P&G’s other channel members.

Data sources: google.cn Problems: On the other side, retailers still make complaints. For example, they said, P&G’s products are too expensive to promote. And because of P&G’s multi-brands strategy, too many shelves are occupied. Recommendations: In order to maintain the leadership in market, distribution counts a lot. Thus, P&G must try to solve this problem. For instance, P&G could design and develop more lower-end products or give more rewards to those retailers who reach the sales target. At the same time, P&G can improve its sales by selling some beauty products in chain drugstores, like its biggest competitor L'Oréal does. Promotion In this competitive market, diversified promotion methods contribute a lot to products selling. P&G makes promotion strategies in the consideration of different cultural backgrounds and market demands. Table 6: Promotion Kinds of Specific examples Results

- 8 - promotion 1.Event 1 After entering the Indian market, P&G held the Caravan 1 Promotion by marketing: ① Show and some products introduction was inserted in the holding roadshow is Roadshow show. The aim of the show is products’ function warmly welcomed promotion performing. by people. ② A special 2 E.g. in order to promote OLAY to office ladies in 18 to 2 This event promotion 50, P&G decided to do the promotion, called spoil marketing about yourself, in some prosperous cities, like New York, OLAY won more Washington, Florida, etc. customers. 2.Symbiotic P&G and Wal-Mart established the network sharing system, e.g. MMI (Manufacturing marketing Managed Inventory), which brought a win-win outcome. That is, the revenue and profit of P&G increased by 50%; the profit of P&G products in Wal-Mart went up by 50% and realized zero inventory. 3.Emotional In recent years, P&G emphasize more on emotional appeal. And Rejoice is the best promotion evidence. The core idea of Rejoice is confidence. It encourages people being confident and optimistic. The idea is well expressed in Rejoice’s advertisement. Data sources: google.cn Apart from those promotion methods, P&G also adopts TV adverting, sponsorship, celebrity endorsement and so on and so forth. Generally speaking, P&G does a good job in the promotion part. Problems: However, in order to stimulate customers’ memory, unlike other companies period TV advertising, P&G never stops doing TV advertising. As a result, advertising cost is always high. Recommendations: One way to decrease the advertising cost can be doing TV advertising on the basis of the Forgetting Curve (by HermannEbbinghaus). That is, intense advertising in the introduction period. With the time goes by, reduce the advertising frequency. At last, keep at a low frequency. As for the sales part, the analysis is as following.

Net sales of P&G

100,000

50,000

0 2006 2007 2008 2009 2010 2011 2012

Figure 2: Net sales of P&G Data sources: annual report of P&G From Figure 2, it displays that the whole trend of net sales remains at $80,000million from 2008 to 2012, with a stable rising. Because P&G is the largest daily cosmetics company in the world, almost all of its markets are at the mature stage. It is very difficult to create any new market share.

- 9 - Figure 3: Net sales in 2011 Data sources: annual report of P&G According to Figure 3, every segment occupies a certain amount in the 2011 net sales, while Fabric care & Home Care segment contributes the most, 30%. And Snacks & Pet Care segment is the weakest part, only weights 4%. In addition, in 2011 net sales, 41% is generated in North America, which means North America is the biggest market of P&G, whereas the least net sales is generated in Latin America. Problems: Although the North American market is the biggest market, it has become the most competitive market. In this market, competitors include Unilever, Henkel Company and Kao Company. The North American market can not be any larger. As for the Western European market, P&G has already been the No 1, which no one else can compete with. Thus, in the Western European market, P&G is also at its bottleneck. Recommendations：Now that the North American market and the Western European market are at the mature stage, P&G just have to keep. It is the Asian market that P&G should pay more attention to as it is the third largest market of P&G. And from Figure 3, the market maturity in developing countries is almost half of that in the developed countries. All in all, P&G should more to develop the Asian market. � Services In P&G’s headquarter in Cincinnati, Ohio; there is a Customer-connecting Center. Approximately 200 professional experts receive customers’ telephone calls about complaints, praises or enquiries all over the world. There are also many other customer connecting centers. P&G keeps in touch and communicating with 7,000,000 customers every year. According to the information they get from customers, P&G is improving products, customer service and even fire some unqualified employees. Problems: On the other hand, still many Chinese consumers do not satisfy with the refund process after buy on the internet. If customers demand a refund, firstly they have to fill in a refund application form. Then, they mail the bottle and deposit copy to P&G in Guangzhou. At last, after the checking procedure, customers will get the refund within 10 to 15 working days. Recommendations: Nowadays, much more customers tend to buy products on the Internet. Hence, the refund part, which belongs to the after sale service, should be improved as soon as possible. In this case, P&G must ensure that customers will get the refund within 5 days.

- 10 - Customers always can be very upset to wait for a long time. 3.1.3 Virtual value chain of P&G:

Figure 4: Virtual value chain Data sources: Book called global marketing For P&G, it has established more than 100 websites. Among all of these websites, many of them offer different convenience to customers. On the other hand, P&G can get much customer information. Some websites are listed as examples. Table 7: Some websites and functions. Websites Function Picture www.pg.com.cn As the official website of P&G

Reflect.com Design and sell customized cosmetic The Proctor & Gamble Co. has closed the products door on Reflect.com in 2005. Tide.com Customers could inquiry washing skills and get some information about Tide products.

Grest.com In addition to know the latest information of Grest products, customers can also read tooth regimina sanitatis emailed by dentists.

Pantene.com Customers can get some suggestions from experts and also buy Pantene products on the website.

BeingGirl.com Established for girls. Introduce boy stuffs to adolescent girls; tells about how to deal with acne,etc.

Data sources: google.cn From Table 7, P&G ceased operation of Reflect.com in June, 2005. The company ceased operations as a result of P&G’s proposed $57 billion merger with The Gillette Co. “We are concentrating on our key businesses,” a spokesman says.

- 11 - Problems: (1) In the official website of P&G, there is no Help hyperlink to help customers. (2)According to the survey conducted by Jupiter Research Company, the maintenance fee of most commercial websites is at least $500,000, up to $7,000,000. If remove these money to key business can be more profitable, it is very necessary to give up some websites. Recommendations: (1) Design a hyperlink in P&G’s official website. It can also put a questionnaire when entering the website. Thus, when thousands of customers finish questionnaires, much valuable information can be collected. (2)P&G should do a research to evaluate if there is any necessity to continue some websites. If the performance of one website is poor for a long time, it is better to give it up. And more resource can be used in other business development so as to confirm the leadership in Chinese market. 3.1.4 Financial analysis In 2008, P&G ranked sixth in market value and fourteenth in profit in the world. In 2011, P&G recorded $82.6 billion dollars in sales. Fortune magazine ranked P&G at fifth place of the "World's Most Admired Companies" list. Table 8: Ratios of P&G 2009 2010 2011 Current ratio 0.70 0.77 0.80 Debt ratio 0.53 0.52 0.51 Cross profit percentage 0.50 0.52 0.51 Data sources: Annual report of P&G

Ratios of P&G

1 current ratio 0.8 0.6 debt ratio 0.4 0.2 0 gross profit percentage 2009 2010 2011

Figure 5: Ratios of P&G Data sources: annual report of P&G According to Figure 5, current ratio increased 0.7 in 2009 to 0.8 in 2011, which means that P&G has more current assets to pay current liabilities. That is, its debt-paying ability is rising. The debt ratio, however, decreased slightly from 0.53 in 2009 to 0.51 in 2011, which represents that fewer assets are financed with debt. As for the gross profit percentage, it increases 0.01 from 2009 to 2011. It is a signal of income increasing. In order to know more information of P&G’s financial situation, cash flow can be an even more valuable measure of a company's long-term financial health. The cash flow statement has three sections, cash flow generated by or used by operations activities (the cash produced by the company's ongoing operations), investing activities (e.g. capital expenditures, acquisitions or sales of businesses or property for cash, etc.), and financing activities (e.g. bank borrowings, debt issuance, and the sale of equity, etc.). Table 9: OA, IA and FA of P&G 2009 (amounts in millions) 2010 (amounts in 2011 (amounts in millions) millions)

- 12 - Operating Activities $14,919 $16,072 $13,231 Investing Activities (2,353) (597) (3,482) Financing Activities (10,814) (17,255) (10,023) Data sources: 2011 annual report of P&G

OA,IA and FA

20,000 OA 0 IA 2009 2010 2011 FA -20,000

Figure 6: OA, IA and FA Data sources: 2011 annual report of P&G Figure 6 states, from 2009 to 2011, the OA of P&G decreased, IA increased and the FA kept stable. Negative cash flow from investing activities means that P&G has spent more money on fixed assets than it has received from the sale of fixed assets in a given financial period. It's usually a sign of a company growing/investing in itself. Hence, the decreasing investing activity of P&G means the growing of P&G Company. Problems: The operating activity of P&G has reduced by 11.3%. The cash generated by the company’s ongoing business has cut down, which can cause the decrease of cash flow. Recommendations: P&G has already used discounts, credit and reward system to increase its cash flow. There are some other ways. (1)Have an Internal Collections System In Place. More often than not, a business will focus so much on acquiring the client and performing the work that it doesn’t dedicate as much time and effort to collect payment. Make sure you send your invoices out immediately upon completion of your work or shipping of your product. If you have the resources, have your staff send a friendly email reminder or make a phone call ten days before the due date (if it’s a Net 30 or more term) to the customer reminding them to make payment. (2)Have a Referral System. Word of mouth marketing is the most powerful and cost-effective way for a business to acquire new clients. People like to do business with those they like and trust; the same is true for businesses. P&G need to have a referral system in place with existing customers, business partners and even employees to help them to refer P&G’s business. After adopting all of these recommendations, P&G can gain more cash flow, which means that P&G is becoming stronger and is making its Chinese leader position stronger. 3.2 External Environments 3.2.1 Political Environment On 1st January 2012 Chinese government adjusts the export and import tax. It reduces the import tax rate to 4.4% for the daily cosmetic.

Tax Rate for Companies in China

30% 25% 20%

15% Chinese companies 10% Foreign companies 5% 0% Year Year after before2007 2007 - 13 - Figure 7: Tax rate for companies in China Data sources: google.cn Nevertheless, since 2007, Chinese tax rate for foreign companies have increased by 18%. Reducing import tax rate is beneficial for an international company like P&G. In Chinese market, 20% of P&G’s raw material is imported from foreign countries. Thus, much raw material cost can be saved. On the other hand, the increasing tax rate in China will raise the tax amount that P&G has to pay. Therefore, P&G may increase sales to cover it. 3.2.2 Economics Environment GDP of China

50000GDP(RMB) 40000 30000 20000 10000 0 2007 2008 2009 2010 2011 Year Figure 8: The GDP Index of China in Recent Years. Data sources: http://baike.baidu.com/view/368359.htm As can be seen from Figure 8, the GDP is stably increasing year by year in China, which means the development of Chinese economy. In 2011, GDP of China is 9.6%. That indicates rapid economic growth, high consumer spending and increased national income. All of these factors are beneficial for P&G Company. Because customers have stronger purchasing power to buy products from them. According to Ou Rui information consulting company, beauty and personal care products’ market share in China will increase by 12%. That is 203 billion Yuan; on the other hand, household cleaning products’ market share will grow by 11%, i.e. 78 billion Yuan. In conclusion, P&G could compete for more market shares, meaning that its market will expand further.

The three industries growing rate in China

16.00% 14.00% Daily cosmetics 12.00% 10.00% Beauty and 8.00% personal care 6.00% products Home cleaning 4.00% products 2.00% 0.00%

1999 2001 2003 2005 2007 2009

Figure 9: Three industries’ growing rate in China Data sources: http://www.doc88.com/p-349518806108.html 3.2.3 Social Environment With the changing of Chinese social environment, customers’ demand changes. Take Chinese consumer confidence index as an example.

- 14 - Figure 10: Consumer confidence index Data source: http://wenku.baidu.com/view/5ecc1882d4d8d15abe234ed4.html Figure 10 shows that the Chinese consumer confidence index is increasing year by year. Because Chinese government is trying their best to improve social security policy including offering cheaper house, better medical treatment and retire security policy. That make Chinese people get more confidence in their lives and therefore, people would like to decrease the deposit and spend money on consumer goods. So the increase on consumer confidence index is benefit for the market. People will think that I can earn money back in the future as they have confidence in their future expectations. Then people would like to consider buying more P&G products, for example, more beauty products to make up, more snacks to enjoy and so on. It can help P&G gain more market share in Chinese market and remain its leadership in China. 3.2.4 Technological Environments On the whole, the consumer goods industry in China is less developed with a slow increasing speed. But with some incentive policies carried out by Chinese government, some native companies also made some achievements. Guangzhou Lonkey Industrial Corporation is one of the representative companies. In home care segment, it invented a new material called MES, which is a kind of detergent raw material. As a new surfactant, MES is renewable. Thus, it is environmental-friendly and is good for the sustainable development. On the other hand, the using of enzymes in detergent is also common in China. In the beauty segment, China is relatively at its mature stage in research and develop herbal cosmetics and in the using of micro-emulsion technology. In the future, China will invest more to develop chemistry industry and will focus on inventing more energy-saving, environmental-friendly materials. Thus, for P&G, it can make full use of it by establishing long and close relationship with Chinese government or by forming a technical union with Chinese science and technology centre. 3.2.5 Competitive environment The main present competitors of P&G: According to Table 1, in the Chinese market, P&G’s main competitor is L'Oréal, which is the world's largest cosmetics and beauty company. Table 10: P&G V.S. L'Oréal ( ★★★★★ is the highest level, while ★is the lowest level. ) P&G L'Oréal Reliability ★★★★ ★★★ Popularity ★★★★ ★★★★★

- 15 - Packaging ★★(No localization) ★★★(More localization) Target market Middle to upper class Mainly middle and consumers upper level Market share ★★★ (16.0% in ★★(14.0% in China) China) Marketing ★★★★(Prefer ★★★★(Prefer function) emotion) Recognition ★★★★ ★★★ Customer Satisfaction ★★★ ★★★★ Marketing Management ★★★★ ★★★

Product Design / Engineering ★★★★★ ★★★★

Business Management ★★★ ★★★★

Information management ★★★★★ ★★★ Distribution channels Direct-selling and agents Direct-selling Financial aspect ★★★★($82,600 ★★ ($25,150 million in 2011) million in 2011) Employees’ training plan ★★★★ ★★ Product development times ★★★ ★★ Defect, error, waste, problem, or failure ★★★ ★ rates

Data sources: http://www.nz86.com/article/101869/ From Table 10, it states that P&G and L'Oréal have their own absolute advantages and P&G has more advantages over L'Oréal. For P&G, it is strong in market share, product design, marketing management and financial aspect, while weak in popularity, packaging, business management and defect rates. Table 11: How to improve How to improve(learn from L'Oréal ) Popularity Sell in chain drugstores: Some brands of L'Oréal, like Vichy and La Roche-posay have got huge success in Chinese market after selling them in chain drugstores. Packaging Localization: In order to attract more Chinese customers, local marketing department should be fully responsible for the packaging and tagging. Business management Cautious attitude: As the president of L'Oréal Brazil Company, Paolo Gasparrini claimed that L'Oréal will always take every aspect into consideration when doing business. Keeping a cautious attitude is significant in business. Defect, error, waste, Impose strict quality control: In 2005, because of SK-II's "heavy metal" cosmetics problem, problem, or failure rates P&G dropped from beauty segment’s $1,000million ranking for the succeeding years. Data sources: http://www.doc88.com/p-003206766353.html 3.2.6 Buying behavior analysis

- 16 - As the time going by, Chinese customers buying behavior changed a lot, to which P&G should pay attention. Table 12: Changes in customer buying behavior Factors Past Now

Supermarkets Infrequent－ Frequent + Grocery Frequent + Infrequent－ Price-sensitive High+ Low－ Quality-sensitive Low－ High + Confidence Low－ High + Various needs Low－ High + Professional knowledge Low－ High + Health awareness Low－ High + Promoting Low－ High + Data sources: summarized by ourselves From Table 12, customers are more price-sensitive, confident, more knowledgeable and more quality-sensitive. Besides, customers pay more attention to health and promoting and prefer supermarkets than groceries. But the most important changing must be customers’ increasing demands. Because more demands can create more market share. Recommendations: Collect more customer information and analyze if there is any new potential market that P&G can develop; more resources and products should be allocated to supermarkets than groceries. What’s more, as mentioned above, P&G should focus on product quality and safety. P&G is mainly doing B2C business. Its major customers are in middle to upper classes. In the Chinese market, however, customer buying behavior has changed a lot.

Products price 8

Products 7 quality

Facility 6

Convenience 4

Sales 5 promotion

0 2 4 6 8 10

Figure 11: Factors ranking when buying products Data sources: http://www.doc88.com/p-518790589019.html Figure 11 states some criteria that Chinese customers are considering during their purchase. From the figure, products price and quality count the most in Chinese customers’ mind. Combining with the table below, more problems can be found in P&G. � Customers' buying criteria and the reality that P&G has done. Table 13: Customers' expectation V.S the reality that P&G has done Customers’ expectation The reality of P&G Criteria 1 2 3 4 5 1 2 3 4 5

- 17 - Price � � Quality � � After-sale � � service Brand image � � Safety � � Social status � � Creativity � � Fashion � � Function � � (1-5 means different levels of Criteria. Bigger number means higher level) Data sources: made by myself according to BAIDU BBS. According to Figure 11 and Table 13, P&G is relatively good in products quality and price. This is benefited from some of its strategies, for instance, P&G puts the biggest factory in Indonesia to lower the labor cost; set strict quality control systems. As for other criteria, P&G is weak in after-sale service and safety. Problems: As analyzed above, they are resulted by the complex refunding problem and the SK-II accident. Recommendations: The recommendations has listed before, they are minimize the refunding days and empower the quality control system. 4.0 Recommendations and Evaluations By analyzing the P&G Company internally and externally, although P&G is excellent in many aspects, in order to keep its leadership in Chinese market, some aspects of P&G should be enhanced as soon as possible. Table 14: Recommendations and evaluations. Recommendations Evaluations Feasibility (in the priority order) Benefits Costs (1)To avoid such quality Improve the quality level. Low High problems, P&G should collect more samples when doing products examination.

(2)More resources and products Increase sales as more Low High should be allocated to customers prefer supermarkets. supermarkets than groceries. (3)P&G can improve its sales by Increase sales. Low High selling some beauty products in chain drugstores. (4)P&G must ensure that Improve the after-sale service. Low High customers will get the refund within 5 days. (5)Cooperate with Chinese Speed the delivery time. Middle High logistics providers. (6)Have an Internal Collections Increase the cash flow. Middle Middle

- 18 - System In Place and a Referral System.

(7)P&G could cooperate with P&G can share techniques as Middle Middle Chinese native companies, well as the tax incentive. being a joint venture. (8)When a new product enters Cover the cost in the short Middle High the market, market skimming term. can be used.

(9)Doing TV advertising on the Save advertising cost. Middle Middle basis of the Forgetting Curve. (10)P&G could design and Gain more market share in High High develop more lower-end Chinese market. products or give more rewards to those retailers who reach the sales target.

(11)P&G should do a research Save cost to support profitable High High to evaluate if there is any brands. necessity to continue some websites.

(12)Cut two or three brands Save cost to support profitable High Middle which ranks last in sales and brands. transfer these resources, to support profitable brands. Data sources: Summarized from the contents above. 5.0 Conclusions The research question of the paper is by analyzing the Proctor & Gamble (P&G) internally and externally, how can Proctor & Gamble maintain its leadership in China. We discuss the question by analyzing P&G’s internal environment (e.g. company profile, traditional value chain, etc.) and external environment (e.g. political environment, economic environment, competition analysis, etc.). During our analysis, we take advantage of some marketing models, such as 4Ps, benchmarking and value chain, as well as some financial knowledge. At last, some recommendations of how can P&G keep the leadership in China are put forward. Those recommendations include expanding distribution channels, improving product quality, cooperating with Chinese logistics providers and so on.

- 19 - 6.0 Bibliography Books: 1.Shiming Xu; Unique P&G; Anhui People’s Publishing House; 2012, P29, 123, etc. 2.Ma Ninfu; Unilever & P&G; China Economic Publishing House; 2006, P55, 93. etc. 3.Rosalind Masterson David Pickton; Peking University Press; 2005, P77, 78, etc. Websites: 1.http://www.baidu.com/s?wd=%E5%AE%9D%E6%B4%81%E5%AE%98%E7%BD%91&ie= utf-8 2.http://www.iciba.com/%E9%97%AE%E5%8D%B7%E8%B0%83%E6%9F%A5 http://www.google.com.hk/search?q=subsidiaris+of+P%26G&client=aff-360daohang&hl=zh-C N&ie=gb2312&newwindow=1 3.http://www.baidu.com/s?ie=utf-8&bs=%E5%AE%9D%E6%B4%81%E5%9C%A8%E5%93% AA%E5%84%BF%E6%9C%89%E5%AD%90%E5%85%AC%E5%8F%B8&f=8&rsv_bp=1& wd=%E5%AE%9D%E6%B4%81%E5%9C%A8%E5%93%AA%E4%BA%9B%E4%BB%A3% E7%90%86%E5%95%86&rsv_sug3=7&rsv_sug1=2&rsv_sug4=22440&inputT=8124 4.http://www.baidu.com/s?ie=utf-8&bs=%E5%AE%9D%E6%B4%81%E5%9C%A8%E5%93% AA%E4%BA%9B%E4%BB%A3%E7%90%86%E5%95%86&f=8&rsv_bp=1&wd=%E5%AE %9D%E6%B4%81%E6%9C%89%E5%93%AA%E4%BA%9B%E6%89%B9%E5%8F%91%E 5%95%86&rsv_sug3=9&rsv_sug4=27233&rsv_sug1=1&inputT=7982 5.http://www.baidu.com/s?ie=utf-8&bs=%E5%AE%9D%E6%B4%81%E6%9C%89%E5%93% AA%E4%BA%9B%E6%89%B9%E5%8F%91%E5%95%86&f=8&rsv_bp=1&wd=%E6%B2% 83%E5%B0%94%E7%8E%9B&rsv_sug3=2&rsv_sug4=5000&inputT=36555 6. http://www.cnki.com.cn/Article/CJFDTotal-YGGY201102018.htm 7.http://www.baidu.com/s?wd=%D6%D0%B9%FA%C8%D5%BB%AF%D0%D0%D2%B5%B 7%A8%B9%E6&opt-webpage=on&ie=gbk 8. http://www.cassdi.org/show.php?contentid=472 9. http://blog.sina.com.cn/s/blog_4d9262cf0100c1yz.html 10. http://www.ocn.com.cn/dm003.htm

i 7.0 Assessment and evaluation of the project process for the group as a whole Our group members are Dong Yunyu, Quan Jinping, Su Li, Shen Si and Li Changhua. The following table shows the strengthes and weaknesses of our group. The 3rd Group Strength Weakness As the leader, Dong Yunyu is good at Because all of us are from marketing class, our organizing the whole paper. ability of analyzing financial statement is Quan Jinping and Su Li can find useful limited. information quickly. Shen Si is good at finding different figures. And Li Changhua loves to do some trivial things, e.g. Printing.

During the process of finishing the paper, we came across many problems. For example, much information was so difficult to find, e.g. Information about P&G's operation, technology development, inbound logistics and so on. We almost spent a week to gather the information. What’s more, we had some disagreement on how to arrange the structure. It was something like brainstorm. Luckily, through our communication and compromise, we solved the problems successfully. Meanwhile, we learned something. Firstly, we know the P&G Company in detail and gain the keys of running a huge corporation. Secondly, we know a team can do things better. Because of the different knowledge level, different members can offer different ideas. And when we put those ideas together, an excellent paper is finished.

ii