US Diapers Industry in

1974 – Barriers To Entry

GROUP 12, SEC-A

ANUJ │NIRAV │TASLEEM │SANDESH │SANJEET
Contents

 Introduction – case facts (Diaper Industry – growth and competition)

 Timeline of Diaper Industry – entry points of various players
 Failure of First Mover Advantage – J&J
 Barriers to Entry – Incumbent Advantage to P&G
 Supporting figures for above
 Options for J&J and UC (futuristic options and suggestions)
Background

 Disposable Diaper Industry- one of the largest consumer products in U.S.-1966

 Estimated Sales of $370 million in 1973, Growth of 25% per year
 Procter & Gamble(P&G) giant player of the industry having 69% market share
 P&G managed to delay entry of few entrants through Patents
 Other players of the industry included Kimberly-Clark (K-C), Kendall subsidiary
Of Colgate-Palmolive’s, Johnson & Johnson (J&J), Union Carbide
 Several players like Borden had quit the market by 1974
Growth

 Huge Potential Market- 3 million babies born each year in U.S.

 Potential Market was 15-50 billion diapers

 The market penetration of disposable diaper increased from 1%of 3.64 mn babies

in 1966 to 42% of 3.14 mn babies in 1973

 Disposable Diaper became largest product category in baby care by 1973

 1962
Prior to 1966 1956 1957 P & G began it’s test market in
Chicopee’s Chux, Kendall’s Pilot Diaper making machine by P & G acquires Charmin Paper Illinois
Curity and Parke- Davis P&G Company Scott Paper working on a
different disposable diaper

1969
1968 1966
P & G national distribution
Kimberly Clark began test Full national distribution rollout 1965
achieved
marketing in Denver and by P & G Borden also started testing two
Pampers modified to beat national rollout Scott was test marketing Baby piece diaper
competitors
International Paper entry Scotts

1971
IP’s fully operational plant completed 1974
1972 Late 1970’s
Chicopee Chux disposable diaper was fading Most competitors using same
Adhesive tapes incorporated in Birth rate was expected to
raw materials and making
Scott discontinues Baby Scotts Pampers increase and reach 3.9 mn by
similar products
J & J enters Ip discontinued Flushabye Paper 1980
Several entrants quit by this time
Borden discontinued White Lamb
Failure of First Mover Advantage – J&J

 Whilst P&G’s Pampers brand has become synonymous with early innovation in
disposable diaper technology, J&J were in fact the first movers in the U.S.
disposable diaper market
 J&J’s Chicopee Mills subsidiary began producing disposable diapers in the
1940’s, twenty-odd years before Victor Mills of P&G ‘invented’ the first
disposable diaper
 However, by 1973, J&J’s market share had eroded to a meager 2%, versus P&G’s
70% and the decision was made to gradually phase out J&J’s Chux branded
disposable diapers in favor of a new, much improved Johnson’s branded
disposable diaper
 However the Johnson’s brand, faced with estimated losses of $10m in 1979 these,
were also eventually withdrawn from the market in 1981
 Factors for Failure of J&J
Company Inertia
• Spent time and effort in
defending the cloth diaper
sales to prevent
cannibalization
Lack of cost
competitiveness
• Priced at over 10 cents per
piece, Chux diapers were
well above consumers’
willingness to pay for a daily
use, disposable items
Inability to
Capitalize on
R&&D
• No patent on polymer
technology which produced
better quality diapers. This
resulted in benefitting P&G,
which released ultra-thin
diapers later.

Competition Cost per Diaper

Niche Radical

J&J Cloth Diaper – Cleaning at home 1-2 Cents

Cloth Diaper – Diaper Service 3-5 Cents
Luxury/Travel Disposable Diaper(J&J) 10 Cents
Incremental Revolutionary

P&G
Barriers to entry
 Very high fixed costs
 Diaper manufacturing equipment were very costly
 Resulting in high costs of installation of new plants
 Manufacturing Process Knowledge
 Tightly held knowledge of production by the incumbents
 Only firms with complementary products tried to enter
 Economies of Scale
 Price was a major deciding factor
 Achieving a scale of operations for low costs took several years
 P&G had already established its production facilities – enabling much lower costs of production than
the competition
 Distribution Networks
 Prior relations of P&G with supermarkets enabled it leverage on it
Artificial Barriers to Entry
 Shelf space in supermarkets
 Retailers had to give in to the pressure by P&G
 P&G had strong presence due to its existing food and related products
 Research Development costs
 Tests on various products showed that cost was not the sole deciding factor
 P&G thus infused a large chunk into R&D ($ 115 million compared to $ 10 million of industry avg.)
 Aggressive Marketing
 P&G deployed dedicated sales team
 8.9 MUSD spent by P&G compared to 6.6 MUSD by KC and 0.16 MUSD by J&J (this is only in 1973)
 Considering P&G total expenses over the years, it is 4 times its nearest competitor
 Aggressive use of premiums and cents-off deals
 Patent Infringement lawsuits
 P&G threatened lawsuits, thereby delaying Johnsons’ brand diapers by several years
 Also initiated action against Weyerhaeuser
 Company P&G K-C
PERCENT OF
Raw Material $ PER UNIT $ PER UNIT Difference Reason
COST

FLUFF PULP 0.006 15% 0.007 -16.67% P&G Integrated, K-C Purchased

COVER SHEET 0.005 13% 0.004 20.00% P&G purchased, K-C Integrated
BACKING SHEET 0.001 3% 0.001 0.00%
PACKAGING 0.003 8% 0.003 0.00%

MANUFACTURING LABOR 0.003 8% 0.004 -33.33% Learning curve

DEPRECIATION AND MAINTENANCE 0.001 3% 0.002 -100.00% Economies of scale

UTILITIES 0.001 3% 0.002 -100.00% Economies of scale

TOTAL MANUFACTURING COST 0.02 50% 0.023 -15.00%

FREIGHT 0.004 10% 0.005 -25.00% Learning curve

SELLING GENERAL AND ADMIN 0.006 15% 0.01 -66.67% Learning curve
PRETAX PROFIT 0.01 25% -0.008

MANUFACTURING SELLING PRICE 0.04 100% 0.03

Total industry sales $ 37,00,00,000 Total industry sales   $ 37,00,00,000

Market share 69% Market share   17%

Company sales $ 25,53,00,000 Company sales   $ 6,29,00,000

no of units 6382500000 no of units   2096666667

Pre tax profit $ 6,38,25,000 Pre tax profit   $ -1,67,73,333

Pluff Revenue $ 3,82,95,000 Liner Revenue   $ 83,86,667

Union carbide options

 UC had developed a patented technology of plastic based inner liner.

 Drydees was believed to be high quality product

Create superior quality, high in price product and market it for a high end niche segment.

 UC sold its products through brokers in supermarket

Create its own distribution network useful for other products as well

 since consumer product is not it’s traditional business line(which required lot of
capital )
Since other businesses of UC has investment need it should sell its patented technology to other firm
J&J Options

 J&J products have high quality but >10cents/piece is higher than a consumer’s
willingness to pay
Increase in investments in developing better process technology

 R&D expenditure in 1973 were $70.9 million

gender-specific diapers optimized for the different anatomies of male and female children, ease of use (re-sealable tapes,
Velcro) and aesthetics (cover prints and designs, pleasing scents)

 Innovation in products is the only way forward to compete in the market

Increase in investments in developing better process technology