A P R E S E N TAT I O N B Y G R O U P 3 :

SURESH BHASIN P G P/ 2 2 / 0 5 3

SANJEETH BALIGA P G P/ 2 2 / 1 2 5

CHIRAJ CHANDAK P G P/ 2 2 / 1 2 7

N I K H I L C H I PA D E P G P/ 2 2 / 1 2 9

S A H I T H I S R I PA D A P G P/ 2 2 / 1 6 5
What are the barriers to entry facing firms such as Union Carbide and Johnson & Johnson in achieving
national brand status? What is the magnitude of P&G’s cost advantage?

Entry Barriers
• Strong brand identity of incumbents is a major entry barrier in the disposable diapers industry
• Matching the brand strength of Pampers brand would require incumbents to achieve national
distribution. But there were two major hurdles in achieving this:
• Strong Manufacturing footprint
• Marketing expenditure

Strong Manufacturing Footprint

• Products were to be introduced one region at a time as
the manufacturers entered regional plants
• However, the lead time to order and install a machine
in a regional plant ranged from 12-18 months
• Moreover, since proprietary technology is involved for
the new entrants, the corresponding proprietary
machine modifications reduce the machine speed.
• The lower operating speed further delayed product
introduction into the market and hence pushed back
the national product distribution
• The delay presents a time window to be utilized by
incumbents to strengthen their existing brand status
Marketing Expenditure
• Aggressive marketing to create brand awareness is
essential to capture a substantial mind share of
the consumers
• P&G indulged in media advertising whose
expenditure was around 56 times that of J&J
• Hence competing against incumbents would
require significant capital outlay in marketing
What are the barriers to entry facing firms such as Union Carbide and Johnson & Johnson in achieving
national brand status? What is the magnitude of P&G’s cost advantage?

Cost Advantage
The calculation procedure has been shown here for P&G and the same can be replicated for other brands

Assumptions:
• The capital investment in a new plant is depreciated in the same year Microsoft Excel
• Since there are 80 machines operating across 4 plants, around 20 machines are present in each plant Worksheet
• One new plant is introduced in each year considering a latency of 12 months
• Fixed investment per plant is $3000000 for P&G and Kimberley-Clark and $4000000 for Johnson and Johnson
Annual Diaper Output Calculation
Calculation of depreciation per Pampers diaper:
Year Number of machines Annual diaper output Fixed investment in plant in 1974 = $3000000
1973 80 12614.4 million Depreciation per diaper = 3000000/(15768-12614.4) = $0.00095
1974 100 15768 million
Calculation of depreciation per K-C diaper:
1975 120 18921.6 million Fixed investment in plant in 1974 = $3000000
1976 140 22075.2 million Depreciation per diaper = 3000000/(2649.024 – 2207.52) = $ 0.0068
1977 160 25228.8 million Calculation of depreciation per J&J diaper:
1978 180 28382.4 million Fixed investment in plant in 1974 = $4000000
Depreciation per diaper = 4000000/(504.576 – 252.288) = $ 0.0159

Cost advantage over K-C diaper = $0.00584/diaper Cost advantage over J&J diaper = $0.0149/diaper
 How can P&G best defend itself against entry? How might it deter entry or “persuade” firms that have
entered to modify their plans?

ENTRY BARRIERS DETERRANCE STRATEGY

Proprietary Product Differences 1. Incentivize traders/brokers to promote Pampers over Competitors
• Leverage marketing network to get feedback from parents • It temporarily shifts shelf bargain towards pampers but higher
and invest in R&D for convenience and fit for babies incentives by competitors would tilt the tables

Brand Identity 2. Imitate test offerings and fast follow in rest of the markets
• Incumbent brand umbrella plays a major role in distribution • The time lag between imitation and commercial manufacture
and marketing would add uncertainty

Economies Of Scale 3. Limit Pricing/Predatory Pricing

• Highly distributed fixed costs leads to higher operating
margins.
• These higher margins enables higher investment in brand
development.
• The market is not price sensitive. Parents’ choices of disposable
diaper brands were highly performance-sensitive
4. Do Nothing
• If I accommodate new entry at cost of few percentage points drop
in market share but absolute increase in sales due to under-
penetrated market and maintain dominance I should not be
investing resources in deterring market entries.
What if P&G does nothing and accommodates the new entrants?
The projected loss in market share will only be 8 percentage points and the absolute manufacturer’s sales for
Pampers will increase as shown below. The sales revenue could be invested in stronger brand building which
will deter new entrants from gaining a long term competitive advantage
Sales projections 1974 onwards
  1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
Manufacturer's
sales($ million) 10 20 60 90 130 200 280 370 507 573 641 714 790 871 956
Percent
penetration of
disposable diapers 1% 2% 7% 11% 15% 22% 35% 42% 46.36% 50.71% 55.07% 59.43% 63.79% 68.14% 72.50%
Number of births 3.64 3.56 3.54 3.63 3.74 3.56 3.26 3.14 3.24 3.34 3.45 3.55 3.67 3.78 3.9

Assuming that K-C and J&J are able to sell all the output from their planned capacity and using figures from the previous
cost advantage calculation
1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977
Total manufacturer's sales
Procter & Gamble
Dollars 10 50 80 120 170 225 255 348 375 402 438
Market share 50% 83% 89% 92% 85% 80% 69% 69% 65% 63% 61%
Kimberley-Clark
Dollars 5 20 62 146 170 194 219
Market share 3% 7% 17% 29% 30% 30% 31%
Johnson & Johnson
Dollars 8 14 28 45 57
Market share 2% 3% 5% 7% 8%
What should Carbide and J&J do? How should they go about entering this industry?

Johnson & Johnson Carbide

• Leverage “Brand Umbrella” of baby care products
• They have “Economies of Scope”
• Distribution Channel
• Transportation to retailers
• Provide “Promotional allowances to trade” to the retailers who are
waiting for such a brand which would over power P&G
• They have brand image of commodity chemical producer. Hence
need to develop a “Brand Image” to overcome “Marketing
advantage of incumbent P&G”
• They have differentiated product but simultaneously they should
develop a differentiated value proposition
• They need to provide more “Promotional allowances to trade” to
retailers to get shelf space
• Realistically they are going to face an intense competition

VALUE CHAIN:

R&D Production Marketing Distribution

• Product Design Efficiency of scale Superior brand building Promotional allowances for
• Material composition with high machine through sampling, coupons better distribution
• Production technology speed and advertisements incentives
How do you expect this industry to evolve? Can P&G do anything to shape the evolution of the industry in
its own favor?

Industry manufacture sales grow @14.5%

Industry is going to evolve as below:
• With major players holding the majority market power
• R&D plays a major role in the value chain
• Innovation in the product (in below terms) is more important
• Convenience of usage for parents
• Fit for baby
• Sanity perception
P&G should build a unique value proposition and focus on
improving convenience to use for parents.
The Industry doesn’t look to be price sensitive as in 1974 price
increase didn’t lead to decline in sales.
Additionally, this market equilibrium among major players is
expected to get disturbed only via disruptive innovation.