Investing In Emerging Markets By Procter & Gamble Research Paper

Length: 6 pages Sources: 6 Subject: Business Type: Research Paper Paper: #69736719 Related Topics: Target Market, Global Expansion, Net Present Value, Market Entry Strategy
Excerpt from Research Paper :

Capital Investments in Emerging Markets

The Procter & Gamble Corporation (P&G) is one of the largest manufacturing companies on the global scene. P&G undertakes its business operations in approximately eighty nations and retails its products in over 180 nations. At present, the company has about thirty five manufacturing plants that are responsible for handling manufacturing and production across the globe. In the preceding year, about 35% of the total revenue generated by the company came from the United States alone. The other 65% emanated from the company's global business operations. The rise in wage levels in middle-income earners has brought about an increase in demand for household goods and merchandises in emerging markets. At present P&G places emphasis on ten emerging market economies; these include: China, India, Mexico, Nigeria, Russia, and South Africa. This limited concentration, and focus, on these emerging markets will assist P&G in tailoring its marketing approaches and also increase its penetration in the new marketplaces. The company will place emphasis on core segments, such as Home Care, Feminine and Family Care, as well as Fabric Care, all of which are fundamentally appealing to consumers.

Methodology to supplement the traditional methods for evaluating the capital investments of your selected company in the emerging markets to reduce risk

There are various traditional methods of valuation that have been employed by companies in evaluating capital investments. These include valuation analysis of the transaction costs and also valuation analysis of the income costs. Nonetheless, in the past decade or so, new methods of valuation have become important. These new methods are centered on future contingent events. One particular methodology that P&G could employ in evaluating and appraising capital budget investments is the discounted payback period approach. This particular method could be of enormous use to the company especially taking into account its different aspects of business operation. In accordance with Bhandari (1986), the discounted payback method covers the period necessary to recover the initial cash investment used in a project, as equivalent to the discounted value of the expected cash inflows. In this methodology, the cash inflows of the project are cumulated in their present values up until the time period when they become equivalent to the initial investment.

The rationale behind this is that this methodology continues to be an important and additional tool for investment analysis, particularly for large companies. This will be especially beneficial for P&G as a growing leader in the manufacturing industry with numerous projects. The discounted payback period will be supplementary to the company because analyzing capital investments with a shorter payback period implies that the company faces less risk. This is because such projects will help the company to be able to recover its investment in a shorter amount of time, so that the capital can be reinvested somewhere else. In addition, with the current fluctuations in the market and the economy, this methodology will be of great benefit to P&G. This is because having projects which have shorter payback periods means that there is very minimal chance or probability that conditions in the market, rates of interest, fluctuations in the economy, and/or other factors that influence the proposed project will change to any great extent.

Assess one (1) way in which inflation could potentially impact planned capital investments in emerging markets and examine one (1) approach to perform an accurate evaluation of the investments. Suggest how this knowledge may impact management's decisions.

Investing in emerging markets offers the likelihood of returns or proceeds that are above average. However, in an obvious way, one of the basic elements or aspects of investing, and particularly capital investment, is that higher returns consist of and encompass higher risks (TRowe Price, 2015). One of the risks that investors ought to take into consideration while investing in emerging markets is inflation. Inflation risk could potentially adversely impact planned capital investments in emerging markets. A combination of strong growth in the economy and having inadequate monetary restraint can bring...

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Inflation can easily devalue currencies, negatively impact company profit margins, and also suddenly reduce and slow down the growth of the economy (TRowe Price, 2015). Delving in more deeply, inflation in numerous emerging markets is a negative aspect, as consumer prices of goods rise above the spending capabilities of the consumers. The devaluation of currencies would hamper P&G, because the emerging market currencies would record lows against the United States dollar. With the increase in the prices of commodities, it implies that companies such as P&G would experience a decrease in consumer spending and therefore a great decline in the global revenue generated (Ridge, 2014).

One of the ways of properly evaluating investments and taking into account the element of inflation in capital budget investments is by using the Net Present Value (NPV) approach. This is derived from cash flows which are inflation-adjusted. So as to employ the discount rate in NPV, it is essential to discount future benefits as well as costs. This is because this discounting mirrors the time value of money; the greater the discount rate, the lesser the present value of the future cash flows, and in connecting the influence of inflation on discounting rate. This might impact the decisions of the managers, because decisions made with regards to capital investments would not be considered being realistic or sensible if the rate and impact of inflation is not properly considered in the analysis. In addition, if such constant factoring is not undertaken, it implies that the outcomes would be subjective, either as an overestimation or underestimation of the success and returns of the investment. In addition, this is of importance to managers while making decisions, because the rate or level of inflation, particularly in emerging markets, considerably impacts the capital budgeting investment decision process. The impact of inflation is a prevalent issue that P&G's management has to face in the course of their capital investment decisions process, for optimum and precise utilization of resources that are scarce particularly in the discounting rate and the cash flows (Axelsson et al., 2002; Mills, 1996).

Contrast the modifications you would make in evaluating the projects to increase internal capacity in North America with the modifications you would make in evaluating expansion projects in the global market. Suggest one (1) way that this information will impact the decisions made related to expansion.

Global expansion is a key driver for growth for most of the middle and large market companies and business. In order to increase the level of revenue and success, international growth has to be included as part and parcel of the company's strategy. In addition, with the world progressively and increasingly becoming global, most of the companies are seeking out ways in which they can steer the level of growth by expanding into global markets. P&G is no exception. As mentioned earlier, out of the company's annual revenue, 35% comes from the United States alone. This shows cause, and room, for international expansion. Being based in the United States, there would be contrasting modifications that P&G would make in the evaluation of projects to increase internal capacity in North America, as compared to the modifications the company would make in the evaluation of expansion projects in the global market. This is largely because with the North American areas being adjacent to, and including the United States, it would imply that there would be minimal barriers of expansion in the region as compared to the global scene. The company would attain greater levels of success expanding into neighboring expanses such as Canada because there are low barriers to entry (Kuehner-Hebert, 2015).

In addition, with North America being a neighboring expanse, it implies that it would be easier for the company to expand and evaluate projects due to the string level of economic growth and also stability in such target markets. They would also have a large potential consumer base because the consumer preferences and taste would only be slightly different. On the other hand, when expanding and evaluating projects for the international markets, the company would face obstacles in terms of rules and regulations in such areas. There are also other factors such as political instability which can negatively affect the business operations, and also cultural barriers that might hamper expansion of projects. In addition, having a challenging tax regime and also economic instability can largely hamper the evaluation and expansion of projects in the global markets. These factors would impact the decisions made in relation to expansion as the managers would make decisions bearing in mind that they have to make sure there is proper coordination in the expansion. It would also affect the decisions by having expatriates who are already cognizant of the complications and also stress in attaining performance in such regions (Kuehner-Hebert, 2015).

Examine two (2) benefits of using sensitivity analysis in evaluating the projects for your selected company. Suggest how this approach…

Sources Used in Documents:

References

Axelsson, H., Jackovicaka, J., Kheddache, M. (2002). Capital Budgeting Sophistication and Performance: A puzzling Relationship. Industrial and Financial Economics. Retrieved from: http://gupea.ub.gu.se/bitstream/2077/2359/1/gbs_thesis_2002_38.pdf

Bhandari, S.B. (1986). Discounted payback: A criterion for capital investment decisions. Journal of Small Business Management, 24, 16.

Iloiu, M., & Csiminga, D. (2009). Project Risk Evaluation Methods-Sensitivity Analysis. OF THE UNIVERSITY OF PETRO-ANI? ECONOMICS?, 33.

Jovanovi?, P. (1999). Application of sensitivity analysis in investment project evaluation under uncertainty and risk. International Journal of Project Management, 17(4), 217-222.
Kuehner-Hebert, K. (2015). Global Expansion Is a Key Goal for North American Mid-Market Firms. Chief Executive. Retrieved from: http://chiefexecutive.net/global-expansion-is-a-key-goal-for-north-american-mid-market-firms/
Morgan, P. (2015). Procter & Gamble Eyeing Opportunities in Emerging Markets. Market Realist. Retrieved 26 August, 2015 from: http://marketrealist.com/2015/07/procter-gamble-eyeing-opportunities-emerging-markets/
Ridge, M. (2014). Depreciating currencies and EM inflation: watch out. Ft.com. Retrieved 26 August, 2015 from: http://blogs.ft.com/beyond-brics/2014/10/09/depreciating-currencies-and-em-inflation-watch-out/
TRowePrice. (2015). Basics of Emerging Market Investing. Retrieved 26 August, 2015 from: http://individual.troweprice.com/public/Retail/Planning-&-Research/Tools-&-Resources/Investment-Planning/Basics-of-Emerging-Market-Investing#What are some of the risks of investing in emerging markets.


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