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P&G Team How Can She.Pdf

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  • 1. Fluff Pulp Fiction: The Disposable Diaper Industry in 1974 Strategy: MBAM 619 March 13, 2009 , G aurav G up ta, S am ir Moh a n, S a rah G ay S a n dro Oli v ie ri
  • 2. Topics Covered PEST of the Diaper Industry Industry Analysis Value Chain & Value Creating Activities Porter’s Five Forces Incumbency Advantages
  • 3. P.E.S.T. Analysis
  • 4. Industry Analysis
  • 5. Size of the Industry Assuming a slowly declining growth rate, 55 diapers per baby per week, and 25 months (on average) of diaper usage, the unit demand in 1974 varies from 16.9 to 17.6 billion diapers Given a 42% penetration rate of diaperable babies and a 69% market share in 1973, P&G was producing 5.2 billion diapers
  • 6. Industry Overview 2002 Census Data Industry Code: 322 - Paper Manufacturing $89,085,026,000 MM Industry Sub-sector Code: 322291 - Sanitary Paper Product Manufacturing This US Industry comprises establishments primarily engaged in converting purchased sanitary paper stock or wadding into sanitary paper products, such as facial tissues and handkerchiefs, table napkins, toilet paper, towels, disposable diapers, sanitary napkins, and tampons. 9,559,179,999 MM sub-sector business
  • 7. Industry Analysis: 1974 By 1973 the disposable diaper industry reached $370MM in sales Manufactures enjoyed sales growth in excess of 25% YoY P&G had 69% of the market share K-C had approx 15% of the market share
  • 8. Industry Analysis: Growth in Disposable Diapers 1966-1973 Manufacture Sales $ MM 400 350 300 250 $ MM 200 Manufacture Sales $ MM 150 100 50 0 1966 1967 1968 1969 1970 1971 1972 1973 Year
  • 9. Industry Analysis: Birth Rate Trends Growth rates had started to decline in the early 1970’s Birth rates were expected to increase by 1976-77 By the late 1970’s 1980’s, births were expected to increase by as much as 300,000 to 500,000 per year, reaching 3.9MM by 1980
  • 10. Industry Analysis: Birth Rate Trends Birth Rate 3.8 3.7 3.6 # of Births in MM 3.5 3.4 3.3 Birth Rate 3.2 3.1 3 2.9 2.8 1966 1967 1968 1969 1970 1971 1972 1973 Year
  • 11. Competitive Players in 1974 Branded: Private Label Weyerhaeuser P&G IPCO Hospital Supply Kimberly-Clark Georgia-Pacific Johnson & Johnson Kendall/Colgate Branded in Test Market: Union Carbide Scott Paper
  • 12. Competitive Analysis: Market Share Market Share 100 90 80 70 P&G 60 K-C 50 % J&J Other Brands 40 Private Label 30 20 10 0 1967 1968 1969 1970 1971 1972 1973 Year
  • 13. Value Chain & Value Creating Activities
  • 14. Value Chain Analysis
  • 15. Value Creating Activities Inbound logistics P&G obtained a portion of their diapers’ fluff pulp needs from a wholly- owned subsidiary, cutting their costs Operating activities Most efficient manufacturer of disposable diapers Highest sales per manufacturing machine Early capital investment in design of diapers (switch to adhesive tabs and fluff pulp) to maximize manufacturing efficiency in the long run Pleated diapers conformed to babies’ bodies better No adhesive tabs to throw away Outbound logistics P&G is able to defray some freight costs (which run up to 10% of retail price) because of their 4 regional manufacturing plants with 5 more on the way P&G’s size made it the only player able to reap the benefits of full- carload and trainload shipments
  • 16. Value Creating Activities Marketing and sales Sampling Programs Relationship with Gift Pax to get their products to new mothers, including a coupon for the first purchase Consumer Advertising – P&G and K-C were outspending everyone here by almost 500%, and P&G spent 35% more than K-C Network television and Spot TV ads Local Newspaper Ads Couponing Used to improve sales in problem markets Promotional Allowances to the trade E.g. One free case for every three the retailer buys Test Marketing Post-sales service Coupons were sent to homes with children at an age where they would need a new size of diaper
  • 17. Porter’s Five Forces Fluff Pulp
  • 18. Porter’s Five Forces Bargaining Power of t n n t ra Suppliers Threat of E Ne w New Entrants Competitive Rivalry The Incumbent Firms Bargaining Power of Customers Threat From Substitutes Substitutes
  • 19. 1. Bargaining Power of Suppliers •Medium bargaining power •Option to produce their own raw materials (like K-C •Few large manufacturing suppliers : complex machines •Volume is very important to supplier •Switching costs are high - machines are finely tuned ( takes years and lots of $ to change)
  • 20. 2. Threat from Substitutes •High threat from substitutes • Other products perform just as well •Ease and convenience of disposal diapers keeps the use of cloth diapers down •High price-performance trade-off (lower priced substitutes (cloth or diaper services) don’t have the same performance)
  • 21. 3. Threat of New Entrants •Low threat •Brand identity is extremely important •Millions of dollars spent on advertising •Shelf space on stores is hard to get (would need to offer coupons and promotional allowances to stores) •Huge setup costs = machines and crews can cost millions of dollars •Economies of scale (takes a few years to get things up to speed) •Access to distribution is extremely important (volume) •Must roll out region by region - timely and costly
  • 22. 4. Bargaining Power of Consumers •High bargaining power - they vote with their pockets •Brand is extremely important •Customers are very sensitive to price •Substitutes are readily available •High buyers’ incentive = coupons, hospital kits •Buyers are very informed of products (starting at the hospital and continuing through heavy advertising)
  • 23. 5. Competitive Rivalry •No exit barriers •Industry is highly concentrated •Large fixed costs •Very little diversity of rivals •Few product differences - all are beginning to offer similar products (adhesive tabs) •Had to differentiate with things like coupons, samples, etc.
  • 24. Incumbency Advantages
  • 25. Incumbency Advantages I  Scale and Learning advantages  Manufacturing – P&G was the largest manufacturer with over 80 machines spread across 4 manufacturing plants  350 – 400 diapers per minute  $5.5 - $6.0 million annual sales rate per machine  Distribution  regional plants and full truck-load (and train-load) shipments helped minimize transport, and transport costs If Kimberly-Clark wanted to catch up to P&G, they would have to spend at least: $18 million * and 2 to 3 years** *Based on K-C immediately purchasing 60 additional machines – this does not count crews and additional infrastructure (buildings, etc..) **complex fold of Kimbies would mean spending years tooling machines for maximum efficiency
  • 26. Incumbency Advantages II  Other cumulative investment advantages  Innovation advantage – the leading manufacturers (P&G included) invested large amounts in R&D to improve the diapers and their manufacturing process Cost to match P&G: at least $10 million annually Promotional advantage – The Pampers brand was  recognizable nation-wide, and required huge outlays in marketing Cost to match P&G: at least $8.9 million annually
  • 27. Incumbency Advantages III  Consumer loyalty advantage  The Pampers brand was not only the most recognized brand in the nation, but was also the highest-rated diaper in consumer reports for 7 years running  New entrants would need to outspend P&G in in promotional efforts to gain shelf space by engaging in promotional allowances to retailers – e.g. 1 free case for every 3 bought Cost to gain on P&G: up to one quarter of revenues (one quarter of revenues = $15.5 Million)
  • 28. Barriers to Entry (Quantified)  If Kimberly-Clark wanted to catch up to P&G, we estimate a cost of: $18 mil in capital outlays for manufacturing, $15.5 mil annually in allowances to trade, $2.3 mil annually in ads, and 2 to 3 years to make it happen. Cost for K-C to catch up to P&G: $53.6 – $71.4 mil * It would cost an To put this in astronomical amount for perspective, a new entrant – the Kimbies brand somewhere in the order brought of $250 million * in $62 mil in 1973 *These numbers only represent diaper related costs (SG&A, Operating costs, etc.)
  • 29. Why So Many Diapers? Huge Market! Around 17 Billion diapers a year Huge Demand! More affluent families looking for convenience and ease Demand expected to increase, even though birth rate might decrease in the upcoming years
  • 30. Why So Many Diapers Couldn’t Handle the Mess? Money! It was estimated that K-C’s diaper start-up cost them $10 million!!! Diaper manufacturing machines are a huge investment Complex, high-speed machines Companies spent almost $10 million a year on R&D Millions of dollars spent on advertising, sampling, etc. Couldn’t roll-out nationally Region by region roll-outs were costly and time-consuming Distribution was expensive Who are you? Brand recognition was very important Big bucks on advertising Big companies started brand awareness at hospital