P&G continued to develop Pampers and national distribution was achieved in 1969.
Pampers enjoyed high profitability through to 1972 when it was the only major disposable diaper brand in the United States. The introduction of Pampers as part of personal care products increased sales from 19% to 27% of total sales between 1967 and 1973.
1.1.1 Product
In 1972 and 1973, P&G carried out product developments on Pampers and incorporated some of the key features of competitors’ products. They changed the inside of the diaper from tissue to fluff pulp, incorporated adhesive tape tabs to replace the original pin fasteners and changed the liner from rayon to a rayon-polyester mix. The product was rectangular and pleated, with the pleats allowing expansion for a better fit.
The diapers were offered in four sizes: Newborn, Daytime, Overnight and Toddler. The type required for any baby could be determined by the weight of the baby. This shows how P&G identified a market need and fulfilled this need through product line extensions.
In 1973 alone, $115.8million was spent by P&G on research and development.
1.1.2 Demand
Demand for disposable diapers had grown rapidly since the introduction of Pampers. The potential market was huge (15-20 billion diapers a year were used in the US alone). P&G had 1% penetration in 1966 with manufacturers’ sales of $10million; by 1973 the percent penetration of diaperable babies had increased to 42% netting diaper manufacturers a whopping $370million in sales. In all this time, the number of births per year was actually declining so this goes to prove the market power of disposable diapers.
1.1.3 Distribution
Diapers were the single most important product in supermarket health and beauty aid departments and retailers allocated significant shelf space to disposable diapers despite the bulk of the boxes. This was because of the high volume and heavy traffic they generated.
As most retailers only carried about two branded diapers, there was an ongoing battle for diaper shelf space. Retailers looked for aggressive support form the manufacturer in form of consumer advertising and trade promotional allowances. As P&G were the market dominators with Pampers, they were least generous to supermarkets and unfortunately for the retailers, there was no major brand that could neutralize their power. P&G relied on brand loyalty and differentiation of their product through high quality to stay market leaders.
1.1.4 Marketing
Branded manufacturers attempted to reach new mothers through sampling programs in hospitals. P&G had locked up the premier hospital kit firm to provide free samples of Pampers, which also included coupons for their first purchase.
Couponing was widely practised throughout the period the baby was in diapers. Lists of the names and addresses of families with babies were purchased and coupons offering money off on diapers were mailed to them when the baby reached the age to move to a larger-sized diaper.
The other major marketing tool was consumer advertising using the major media i.e. network and spot television, radio, newspapers and specialized magazines. P&G spent more money on advertising between 1966 and 1973 than any other diaper manufacturer. From 1972, they carried out intensive and aggressive marketing efforts to maintain their market share after competitors became a force to be reckoned with. Over $8million was spent in 1972 alone on media advertising.
1.1.5 Manufacturing
P&G practised backward integration through one of their divisions Buckeye Cellulose that manufactured fluff pulp. This resulted in some economies of scale and lower costs. Fluff pulp purchase is approximately 15% of total raw material costs so this integration was very favourable for P&G.
Transportation costs were very high because diapers are bulky. P&G were able to gain have significant cost savings by carrying larger amounts at a particular time i.e. carloads and even trainloads of diapers. Also, P&G had achieved national distribution and had four regional plants. This reduced transportation costs significantly as well.
1.1.6 Competition
P&G had the strongest market position between 1966 and 1974. By 1974 they were the only diaper manufacturer to have achieved national distribution through their regional plants.
In 1967, P&G had a 50% market share with the other 50% shared between all other branded and unbranded diapers. In 1970 this percentage had increased to 92% since Pampers was the only branded diaper on the market. Parents’ choices were highly performance-sensitive and Pampers offered quality at a reasonable price compared to unbranded diapers.
After 1970 however, Kimberly Clark who had always been P&G’s closest competitor introduced the branded diaper Kimbies and marketed aggressively. P&G’s market share dropped significantly over the years from 85% in 1971 to 69% in 1973.
1.2 STRATEGIC TOOLS
1.2.1 Strategic Focus
P&G’s strategic focus was to achieve long-term profitability by increasing its volume of production. After the initial test market, the production costs were deemed too high and this caused a high price to be charged. To increase volume, the process was re-engineered and costs were reduced by means of their new continuous process, which produced 400 diapers a minute. They were then able to reduce the price charged per diaper from 10c to 5.5c.
1.2.2 Ansoff Matrix
Pampers could fit into two parts of the Ansoff matrix. In 1962 Pampers was a ‘new’ product, a similar product (cloth diapers) however existed before this time. P&G thus carried out trial market penetration to introduce a ‘new product to current market’. This proved unsuccessful and product development strategies were then put into place from 1962 to 1966 when the product was re-introduced as a ‘current product to the current market’.
Between 1966 and 1973, market penetration strategies were carried out in form of sampling programs and media advertising. Also, product development strategies were continuously practiced as soon as new market needs were identified. Examples of these were product design improvements e.g. tissue to fluff pulp and product line extensions to increase their size range e.g. newborn and toddler sizes. These strategies are all characteristics of ‘Current products to Current markets’ and were practised to maintain and in some cases, increase market share.
1.2.3 Porter’s Generic Strategies
P&G use the ‘Cost Leadership’ strategy with high market share and a high return on investment. They supply their product more cost-effectively than any of their competitors; they have high-speed machines and produce the largest volumes. They have gained competitive advantage through lower costs and have a broad target as their competitive scope.
They practice cost control e.g. transportation cost savings are made with large shipments, regional plants and backward integration to fluff pulp through Buckeye Cellulose. They maintain good quality through continuous product and process improvements and the market is a stable environment with good growth estimates, as babies will be born every year.
1.2.4 Driving Force
P&G have two main driving forces that build on their competitive advantage and provide a means of creating strategic clarity.
‘Low Cost production force’ can be confirmed, they maintain competitive advantage through their advanced process technology enabling economies of scale through large volumes; cost conscious management as is proven in their cost control practices described in the previous section. A lot of money is invested in research and development; this keeps them up-to-date with advances in technology and process methods. Pampers can be called a standard product and has a relatively limited range compared to other consumer products.
‘Markets Served force’ can be confirmed as well; this is proven in their strong relationships with customers through sampling programs and consumer advertising. This generates customer loyalty as market needs are fulfilled in a superior way at a low cost.
1.2.5 Boston Consulting Group Matrix
Pampers is a ‘STAR’ product for Procter & Gamble. It has a high market share with a high industry growth rate. Growth estimates were calculated as a function of forecast births, disposable diaper penetration and the number of diapers consumed per baby. All observers agreed that growth would continue at a considerable rate.
The diaper market was a very profitable one and revenue was reinvested into product line extensions and R&D for product and process improvements i.e. the cash flow was neutral. As Pampers generated so much revenue, it would have been a recommendation for P&G to invest some of the extra revenue into their ‘QUESTION MARK’ products like their food range, which was not very wide and had minimal market penetration.
1.2.6 McKinsey/General Electric matrix
The market attractiveness of disposable diapers is high; the market size is very large, as every baby between 0 and 24 months would almost certainly have been using a type of disposable diaper in 1974. The market growth rate was quite good at the time and has even increased since then according to estimates. It’s a very profitable market with sales for P&G of about $3.9billion in 1974. There is high competitive rivalry and a relatively good opportunity to differentiate products.
Pampers had a high competitive strength; it had excellent brand strength compared to other brands. It had the highest market share and had generated customer loyalty and a good cost structure. It also has the strongest distribution channels so achieved national distribution before any of the other brands. As it was produced by P&G, one of the world’s largest and most successful companies, there was access to financial and other investment resources.
In the Mckinsey/GE matrix, Pampers occupies the top left corner.
2 Kimberly Clark
2.1 KIMBIES
Kimberly Clark was a leading producer of consumer and industrial paper products and forest products. Its businesses are divided into U.S consumer and service products, U.S paper and forest products and operations outside the U.S. Its disposable diaper brand is called Kimbies and is part of the U.S consumer and service products.
K-C’s research on disposable diapers for hospital nurseries in the early 1950s had been unsuccessful. The project was rejuvenated in the late 50s and early 60s. Their development efforts were based on different technology; they were the pioneers in the use of fluff pulp instead of tissue for the diaper. Fluff pulp was cheaper per unit of absorbency and K-C capitalized on this cost saving by designing a diaper with innovative built-in adhesive tabs. Kimbies also employed a unique shape to improve their fit.
After extensive development efforts with hospital nurseries, K-C began test marketing in 1968 and went into a national rollout in 1971. By 1973 Kimbies was manufactured in five regional plants.
Kimbies was the company’s single largest investment at a time when it was bearing costs of introducing several new lines of feminine sanitary products and facing heavy sales promotion costs in an area where P&G was intent on building share. Kimbies diapers were being rolled out nationally through the addition of one new diaper machine every six weeks. By the end of 1973, 85% national distribution had been achieved.
K-C was also making a strong effort to expand its international operations and to boost its return on stockholders’ equity. Four marginal paper mills were eliminated and smaller consumer product lines that lacked promise were discontinued.
K-C’s management objective was to achieve a 33% market share and market share growth of Kimbies up to that time had met these objectives. Expenditure in 1973 on research and development was $12.7million. Sales increased from $5million to $62million between 1971 and 1973.
2.1.1 Product
Kimbies was of one-piece construction with a fluff pulp bulk. Its inner layer was made of a hydrophobic material. Kimbies were not pleated but had a unique triangular shape with a contour fold designed to improve fit. These were quite difficult to manufacture at high speeds. They had adhesive tabs for fastening and its inner liner was a mixture of rayon and polyester that was integrated into the process. Kimbies was also offered in a variety of sizes in 1974.
2.1.2 Manufacturing
‘All the major manufacturers made major and costly proprietary modifications to achieve competitive machine speeds and to produce their particular variety of diaper’.
Kimberly Clark manufactured its own inner liner but purchased the other components of the diaper. With five operating plants and 20 machines producing diapers at 200-275 diapers a minute, K-C was the only company that could compete with P&G in large volume production.
2.1.3 Competition
In 1971 Kimberly Clark had just a 3% share of the disposable diaper market with the introduction of Kimbies. Heavy investment was made into promoting the brand and a steady significant increase in market share was observed.
K-C had 7% market share with $20million in sales in 1972 and this figures had increased in 1973 to 17% market share and $62 million in sales. The ultimate goal of K-C’s management was to achieve a 33% market share, the growth trend from the previous three years shows that this goal would have been achieved in the immediate future.
K-C was a major threat to P&G in 1974 and spent $6.6million on media advertising alone to increase its market share.
2.2 STRATEGIC TOOLS
2.2.1 Strategic Focus
Kimberly Clark’s strategic focus in 1968 was to achieve long-term profitability through cost reduction. Their initial product in the early 60s was unsuccessful so they used a different technology involving fluff pulp, which was a cheaper material. This cost saving enabled them to capitalize on specially designed adhesive tabs.
This cost reduction strategy not only increased volume of production but also enabled K-C to differentiate their product with the pioneering fluff pulp and adhesive tabs.
Between 1971 and 1973 when Kimbies was introduced, strong investment was made to increase volume and gain market share. They boosted international operations as well to expand the market.
2.2.2 Ansoff Matrix
In 1968 Kimbies was introduced after pioneering process improvements that fulfilled an identified market need. It increased its market share from 7% to 17% by market penetration strategies such as media advertising and geographical expansion. Kimbies was a ‘Current product to current market’.
2.2.3 Porter’s Generic Strategies
K-C implemented ‘Differentiation’ based on technology. Added value could be seen in form of safer, more convenient adhesive tabs and highly absorbent fluff pulp used in Kimbies.
This strategy was based on innovation and marketing using a mix of features including unique triangular contour fold for better fit and unpleated edges.
K-C had a link to suppliers through backward integration for their inner liner and expert, co-ordinated staff to operate the complex machines used in making the difficult contour folds.
The risks involved in using this strategy was that of imitation; their fluff pulp and adhesive tab ideas were soon copied by P&G for use in Pampers. Differentiation then became less important as all other manufacturers used these designs. The costs involved in implementing these unique features then became increasingly significant, as they were not balanced anymore with premium prices usually associated with differentiation.
2.2.4 Driving Force
The main driving forces behind Kimberly Clark’s success were ‘Technology force’ and ‘Products offered’ force.
Basic technology was applied in innovative ways to satisfy existing consumer needs and competitive advantage was based on unique expertise quality and application. This technology force however could not be sustained after competitors gained advances.
The new Kimbies met a basic need by buyers for more absorbent, easy to use diapers and competitive advantage was to meet customer needs through this differentiation. The product offered in 1968 was unique for a period of time and gained premium price for these features and benefits.
2.2.5 BCG Matrix
Kimbies was the company’s single largest investment. The market growth rate was high and in 1974 the product had a medium market share. The product was a QUESTION MARK for K-C in 1974.
2.2.6 McKinsey/GE Matrix
With a high market attractiveness and medium competitive strength, Kimbies would fit into the first column and second row of the McKinsey matrix. Its brand strength was low compared to Pampers at the time but increasingly getting better and definitely much stronger than any other branded diaper.
With five regional plants, K-C had good distribution strengths and a relatively good access to financial resources. However, they have an excellent record of technological innovation.
3 JOHNSON & JOHNSON
3.1 OVERVIEW
Johnson & Johnson were a leading manufacturer of prescription and non-prescription healthcare products as well as some specialized industrial products such as adhesives and textiles. Its businesses were distributed into healthcare (J&J Baby Products was a division of healthcare), industrial and other products, and international operations.
Before 1966, J&J was the leading manufacturers of cloth diapers through its subsidiary Chicopee Mills. Disposable diapers brands called ‘Chix’ and ‘Chux’ were also produced there and sold through drugstores. These had minimal penetration due to high price and crude designs. J&J concentrated their research efforts and financial investment on defending their cloth diaper business.
By 1971, P&G had introduced Pampers and cloth diapers were hardly used. Chicopee cloth diaper was discontinued and the Chix/Chux brands were fading from the market. J&J then announced its strategic decision to focus on disposable diapers under Johnson’s brand name. Research had been carried out earlier and the new product had been developed but had not been launched due to patent problems with P&G. The new diaper had already been tested with great success.
J&J’s product was of premium quality and had a superior, patented inner liner and adhesive tabs. The liner was thick and spongy with an unusually soft feel and the diaper was the most absorbent on the market.
By mid-1972 the diaper was in test markets and achieved considerable sales success at the expense of Pampers. $168,000 was spent on advertising in 1968 to achieve market penetration for the new product. By 1973, J&J brand had a 2% share of the disposable diaper market and $8million in sales.
3.2 STRATEGIC TOOLS
3.2.1 Strategic Focus
Before 1971 J&J maintained a high share in the cloth diaper market with the Chicopee brand. After this was discontinued, market penetration strategies were employed to introduce the new Johnson brand of disposable diapers. A new 400,000 sq. ft plant and distribution facility was purchased for this product to increase volume of production; long-term profitability was aimed for with this strategy.
3.2.2 Ansoff Matrix
Johnson brand of diapers was a ‘New product to current market’. After discontinuing the original diaper brand under the Chicopee Mills subsidiary, product improvements were made and a superior quality diaper was developed. This is a product development strategy to provide a new product to the same market. They also had product line extensions by offering a range of sizes of diapers that were not offered under the Chix and Chux brand.
3.2.3 Porter’s Generic strategies
J&J employed a ‘Differentiation Focus’ strategy to gain competitive advantage. Though their target for competitive scope was narrow compared to say, P&G, they exploited the differences in special needs of buyers and offered a premium quality product. They gained customer loyalty and by 1973 had won over 2% of the market that would otherwise have bought Pampers.
The Johnson brand diaper was an extension of baby care products already being manufactured by J&J. The name Johnson was synonymous with babies and they built on this brand strength to increase their customer loyalty and base.
3.2.4 Driving force
The two driving forces behind J&J’s strategy for competitive advantage are ‘Markets served force’ and ‘Technology force’.
J&J had been in the baby care market longer than any of its competitors and the brand name was synonymous with quality healthcare products for babies. J&J had a strong customer relationship with customers all sharing common needs. These needs were understood and fulfilled in a superior way. New products were being developed and the Johnson brand diaper was one of a few. Products had relatively low costs of production and J&J had a massive new plant in operation with another one announced.
They also based their strategy on technology using a unique patented inner liner with an unusually soft feel. Basic technology was being applied in innovative ways to satisfy existing customer needs. The products were licensed so that competitors could not imitate the inner liner for at least seven years. Competitive advantage was gained through unique quality and applications.
3.2.5 BCG Matrix
Johnson brand diaper was a QUESTION MARK product. Though the industry growth rate was high, the relative market share was low in 1974.
3.2.6 McKinsey/GE Matrix
With a high market attractiveness and low-medium competitive strength in 1974, the Johnson brand diaper would be in the bottom left corner of the matrix.
4 OTHER COMPETITORS
In 1974 there were various smaller competitors in the disposable diaper market. These manufacturers had relatively small market share but were growing and gaining competitive advantage in their chosen strategies for success. The table on the following page shows how these companies fit into the strategic tools used in the previous sections:
5 PORTERS FIVE FORCES: Industry Structure Analysis
5.1 COMPETITION AMONG EXISTING FIRMS - Intensity of Rivalry
Between 1968 and 1971, P&G was the clear market leader in the disposable diaper market. Its market share increased yearly because they were aggressively advertising Pampers to expand its market. The strategic objective of P&G was to gain as much market share as possible. It had many competitors, but all of them were minor manufacturers, and their market share was decreasing in comparison with P&G’s. Its competitors were trying to take advantage with respect to other small competitors. Minor competitors had the same strategic objective; therefore intensity among these small manufacturers was relatively high though they did not pose a threat to P&G.
In 1971, two events changed the structure of competition. Firstly, K-C made a strong investment to develop Kimbies; which began to gain market share, becoming a real competitor for P&G. Secondly, many companies discontinued production because the market had become saturated and it became extremely difficult to have sustainable market share. Since then, and concretely by 1973, the positions in the industry became more stable.
The disposable diaper industry had a relatively big capacity for differentiation. In this context, rivalry was lower than other industries that didn’t have the possibility of differentiation. Each company tried to improve its product; it was the period when the disposable diaper that is known today was being developed. By 1974, differentiation was minimized because of the effects of imitation among competitors. Consequently, rivalry began to show a growing trend.
Switching costs between cloth and disposable diapers were not significant in the and many customers were encouraged to test disposable diapers for the first time, with no additional cost than the difference in prices between cloth and disposable diapers.
Exit barriers however were relatively high because of the cost of the machinery, not only for mechanical purposes, but also in the investment in research and development. In this sense, the rivalry was higher than other industrial sectors with lower exit barriers.
5.2 THREAT OF NEW ENTRANTS
Because of the high growth rate of disposable diaper market, and the growth estimates for the subsequent years, a high risk of new entrants exists. Moreover, the cost of entry into the business is reasonable, keeping in mind the possible operating profit. In fact, many entries occurred in the period from 1966 to 1970. By 1971 many of them had gone bankrupt and discontinued production. However, a few entries such as Weyerhaeuser, producing diapers for private label occurred subsequently.
5.3 THREAT OF SUBSTITUTES
Disposable diaper is a substitute product for cloth diapers. In 1974, disposable diapers were just being developed and had proven to be a very successful product, hence it did not seem the right time to introduce a new product.
5.4 SIZE OF BUYERS
In the United States of America, there were more than 3 million babies born every year. Experts evaluated the potential market to be 15-20 billion diapers a year. Although birth rate was decreasing during late 1960s, it was expected to rise again and reach a peak in the late 1970s. Also, diapers were a key product within the baby care range so vast size of buyers made the industry very attractive.
5.5 STRENGTH OF SUPPLIERS
In general, all manufacturers used to get some key components of disposable diapers from suppliers. Inner liner, outer liner and fluff pulp were, by 1974, the most common components that were provided from different suppliers. Fluff pulp was supplied only by a few suppliers hence prices were frequently being increased. This fact made manufacturers increase their prices in order not to lose productivity. Suppliers had a relatively high bargaining power over major and minor companies. To minimize this power, some companies began to integrate some components. Another reason for this integration was to differentiate the product and gain competitive advantage. On the other hand, some suppliers tried to integrate forward into the industry with their own brands, for instance Weyerhaeuser, who initially supplied fluff pulp, began producing disposable diapers successfully for private label. Suppliers in the disposable diaper industry had immense strength.
