Corporate Social Responsibility: The Corporate Governance of the 21st Century - Essay Example

? Macro and Micro Economics Currently, the degree of competition is increasing significantly in the marketplaces. At this juncture, it has become extremely important for business firms to operate according to the economic theories. This essay will show how Procter and Gamble carries out its day to day business dealings on the basis of microeconomic theories. The theories like, Theory of Demand, Theory of Market Structure and Theory of Long Run business, would be used by the researcher to conduct the analysis. The researcher would use several real life evidences to show the empirical verification of the analysis. In the final stage, the paper would explain several further businesses and operational strategies that the company can adopt in future. With the help of these theories, the company would be able to improve its business in future. The learnt from the essay would help to understand the importance of economics in the current state of business affairs. Contents Contents 3 1. Introduction 4 1.1 Report Brief 4 1.2 Company Background 4 2. Literature Review 5 2.1 Demand Theory 5 2.2 Market Structure Theory 6 2.2.1 Differentiation and Revenue Maximizing Theory 7 2.3 Long Run Theory 7 3. Case Study 8 3.1 P&G and Theory of Demand 8 3.2 P&G and Market Structure Theory 10 3.3. P&G and Long Run Theory 12 4. Conclusion and Recommendations 13 Reference List 15 1. Introduction 1.1 Report Brief This essay will analyze the business of the famous American consumer goods company named Procter & Gamble (P&G). The researcher would analyze the business performance of the company on the basis of economic theories by scrutinizing the company’s annual report. In the later stage, the researcher would explain the business and operations strategies undertaken by the company through the analysis of its corporate activities. 1.2 Company Background P&G, the famous consumer goods company in America has its headquarters in Cincinnati, Ohio, United States. The products which are produced and sold by the company are primarily categorized in terms of three segments. These are cleanup agents, pet foods and individual care products. The company enjoys a high brand value in the market, with annual sales of about $83.68 billion (2012). The organization also enjoys a wide social presence in the market. It operates in almost all the countries in the world and as recorded in 2012, its operating income was $13.29 billion (P&G, 2012). The following context of the paper would explain the performance of the company by analyzing its annual report on the basis of economic theories. 2. Literature Review 2.1 Demand Theory Demand for a commodity or a service in the market is the want of an individual backed by proper purchasing power. If a demand is created by a single household in an economy, then it becomes an individual demand. The horizontal integration of all the demand curves is termed as the market demand curve. According to the law or Theory of demand, considering the other factors affecting demand to be constant (Ceteris Paribus), the quantity demanded for a product is inversely related to its prices and vice versa (Mullerat, 2011). Thus, a market demand curve is always negatively sloped in nature with the assumption of Ceteris Paribus. Figure 1 Demand Curve Price Demand Curve (Market or Individual) Quantity (Source: Authors Creation) A shift in the demand occurs when other factors affecting demand, apart from price, changes. These other factors include tastes and preferences of the consumers, price of substitutes and price of complements along with income of the consumers. Figure 2 Shifts in Demand Curve Price Initial Demand Curve New Demand Curve Quantity Demanded (Source: Authors Creation) The above diagram shows a shift in the demand due to changes in any of the demand determinants. 2.2 Market Structure Theory The market structure theory explains the exact type of market in which organizations can operate. The market structural differentiation is mainly categorized on the basis of the strength of the seller and buyer in a market. The following table explains the major types of market structures in the theory of economics. Table 1: Different Types of Market Structures Market Structure Number of Buyers Number of Sellers Type of Products or Services Business Objective Perfect Competition Infinite Infinite Homogeneous Revenue Maximization Monopolistic/Oligopolistic Infinite Few/8 to 10 Heterogeneous or Differentiated Profit Maximization Monopoly Infinite One Heterogeneous Profit Maximization (Source: Authors Creation) Apart from the first category in the above table, the other market structures depict imperfect competition. The heterogeneous products sold by these sellers are differentiated in terms of quality or price. 2.2.1 Differentiation and Revenue Maximizing Theory The Differentiation Theory explains that the products sold by the sellers would be different in terms of qualitative factors like, colour, price and packaging. A monopolist or a monopolistic seller may always differentiate on the prices. For instance, a doctor can charge higher to the rich patients and relatively lesser to the poor ones. This approach is often undertaken by the sellers to maximize the revenue or profit in business. On the basis of the Revenue Maximization Theory, the seller tries to maximize the revenue subject to the minimum amount of cost requirement (Gaffey, 2004). 2.3 Long Run Theory The time period in which a business operates can be divided in terms of Long Run and Short Run. The short run is the span of time in which a business organization can change its variable factors in business like, labourers. The fixed factors in a firm like, machinery cannot be changed in the Short Run. On the other hand, according to the Long Run Theory, the firms in the long run business can expand its scale and scope of operations in business. All the factors of production are variable in the Long Run. The economies of scale in production can only be experienced by a firm in the long run. 3. Case Study After considering the annual report and the business performance of P&G, the researcher would enumerate the business recital of the organization on the basis of the above mentioned microeconomic theories. 3.1 P&G and Theory of Demand It can be stated in the annual reports of the company that in the last few years, the sales of the products of P&G has significantly increased in the market. In 2013, the sales of the products of the company has increased by 2% (till September), that accounts to about $21.1 billion (Porter, 2008). According to the Theory of Demand, the rise in the demand for the products introduced by P&G is primarily due to rise in the income level of the consumers. After globalization, the Gross Domestic Product (GDP) level of all the countries has increased. The rise in the level of GDP has also increased the per capita income thresholds of the individuals. The rise in per person level of income has increased the level of consumption expenditure of the individuals for the consumer goods products (Smith, 2010). Figure 3: Rise in Consumption Spending (Source: Tutor2u, 2012) The above graph shows that after the global recession in 2009, the consumption spending of the consumers in the world have increased. This is the Income Effect of Demand, which assumes that the price level of products are constant in the market and the rise in the income of the consumers causes a Shift in Demand curve of the organization. Thus, the rise in the sales of the company is actually a shift in its demand curve (Vezzoli and Manzini, 2008). The population in the world have increased over time. The population hike in most of the economies in the world has increased the strength of the loyal customers of P&G. According to the Theory of Demand, the additive summation of the individual demand curves of the consumers of P&G has increased the aggregate market demand of the entire company. Figure 4 External Integration Theory Market Demand Curve 2011 Market Demand Curve 2012 Market Demand Curve 2013 + = (Source: Authors Creation) The above diagram takes a hypothetical example to show that the demand for the products of P&G has increased due to the rise in individual demand for its products in the market. 3.2 P&G and Market Structure Theory P&G operates in a Monopolistic Competitive market structure. This is because there are a few sellers of consumption goods in the market and the numbers of buyers are infinite. The products sold by the company are highly differentiated in nature. Figure 5: Differentiated Products of P&G (Source: Medill, 2013) The above bar chart shows the main classification of products sold by P&G. The company produces different types of products to maintain a leading position in the competitive marketplace, where it operates. The company is trying to cope up with its market rivals like, Colgate and Uniliver. According to the Theory of Revenue Maximization, the company is trying to enhance its business productivity by reducing its cost of manufacturing in order to lead in the competitive market. Figure 6: Monopolistic Competition (Source: Ng, 2013) The above graph shows that P&G corporate performance was lower than that of Uniliver till the end of 2012. From the beginning of 2013, the company’s business performances in the market have improved. P&G has tried to take the First Mover Advantage in the market by using the low priced European fibre for its diapers, in order to sell it at a cheaper and more profitable prices in the marketplaces (Yuece, 2012). 3.3. P&G and Long Run Theory According to the Theory of Long Run, P&G has expanded its productive capacity to enjoy economies of scale in production. In such a situation, the rate of increase in output level is more than the rate of increase in the inputs of production. P&G have taken active initiatives to expand the demand of its manufactured products in the market. It has tried to initiate a variety of brand stretching programs to offer the consumers wide-ranging goods and services in the market. In order to enjoy a broad base of loyal customers, the company has also invested money in various kinds of corporate social responsibility programs. The company has invested large sums of money in programs like, Children Safe Drinking Program (CSDW), Born Learning Program and Disaster Relief Program (Rogers, 2001). The ultimate aim of the company is to enjoy a large market demand, so that it can expand to its required production threshold and enjoy economies of scale in production. By doing so, the company can act as a natural monopolist in the market with a very low average cost of production. For instance, as India is a booming economy in the world market, P&G has invested about 245 crores in order to build a manufacturing plant in Hyderabad for selling more products at cheaper cost to the Indian consumers (Amirapu and Malwiya, 2012). Figure 7: Economies in Scale (Source: Authors Creation) The above graph shows that by achieving economies of scale in production, P&G has reduced per unit cost of production of theirs, thereby maximizing its market demand (Nieuwenhuizen, 2007). 4. Conclusion and Recommendations It has been analyzed that the primary threat of the company is the extensive competition that it faces in the market. It is also true that the company faces certain difficulties to reduce the cost of production of several items. The company should appoint some skilled technical professionals so that they can employ new cost saving and efficient means of production (Butje, 2005). The company should also try to introduce environmental friendly production methods. This can be done by reducing the extent of carbon emissions from the manufacturing plants of the company. The consumers in the modern world are becoming more conscious about protection and preservation of environment. Thus, through active initiatives in environmental friendly business practices, the company can augment the demand for its products in the market (Elearn, 2013). As a strategic move in business, the company can try to expand its business in the emerging economies in the world like, Russia and China. As an operational strategy, the company can organize more reward and training programs for its employees (Hawkins, 2006). This would help the organization to enhance the skills of its employees and motivate them to work better. It would be right to conclude that P&G is a profit and revenue maximizing monopolistic firm that attempts to sell differentiated products in the market. Therefore, all the business and operational strategies that should be adopted by the company must have the underlying aim of achieving higher profit (McCabe, 2009). Reference List Amirapu, D. and Malwiya, S., 2012. P&G to build largest Indian plant in Hyderabad. The Economic Times, 20 April. Butje, M., 2005. Product Marketing for Technology Companies. London: Routledge. Elearn., 2013. Business Environment Revised Edition. Butje: Routledge. Gaffey, S., 2004. Signifying Place: The Semiotic Realisation of Place in Irish Product Marketing. Farnham: Ashgate Publishing, Ltd. Hawkins, D. E., 2006. Corporate Social Responsibility: Balancing Tomorrow's Sustainability and Today's Profitability. Basingstoke: Palgrave Macmillan. McCabe, S., 2009. Marketing Communications in Tourism and Hospitality: Concepts, Strategies and Cases. Amsterdam: Elsevier. Medill, 2013. Marketing initiatives impact P&G’s second-quarter net sales increase, 6 percent drop in earnings. [online] Available at [Accessed 21 November 2013]. Mullerat, R., 2011. Corporate Social Responsibility: The Corporate Governance of the 21st Century Ramon. Alphen aan den Rijn: Kluwer Law International. Ng, S., 2013. Procter & Gamble's Profit Rises on Higher Sales. Wall Street Journal, 25 October. Nieuwenhuizen, C., 2007. Business Management for Entrepreneurs. Landsdown: Juta and Company Ltd. P&G, 2012. P&G helps improve homes and health for people in need around the world. [online] Available at: [Accessed 21 November 2013]. Porter, M. E., 2008. Competitive Advantage: Creating and Sustaining Superior Performance New York City: Simon and Schuster. Rogers, S. C., 2001. Marketing Strategies, Tactics, and Techniques: A Handbook for Practitioners. Connecticut: Greenwood Publishing Group. Smith, F., 2010. Environmental Sustainability: Practical Global Applications. United States: CRC Press. Tutor2u, 2012. Consumption theory. [online] Available at: [Accessed 21 November 2013]. Vezzoli, C. and Manzini, E., 2008. Design for Environmental Sustainability. New York: Springer. Yuece, I., 2012. SWOT Analysis of McDonald’s and Derivation of Appropriate Strategies. Munich: GRIN Verlag. Read More