The Disposable Diaper

Industry
Assignment
Submitted By:
Group 8
Aashutosh | Krutika | Rajinder | Sumiran | Vacha

Submitted To:
Prof. Rakesh Basant

Date:
6 August, 2018
Q1. What are the various entry barriers erected by incumbents in the disposable diapers
industry? Which of these entry barriers are more sustainable than others? Why? What is
the cost advantage of P&G?

● High setup costs- The Disposable Diaper industry has the Blockaded Entry condition
which is characterized by large investment requirements or high sunk entry cost. The
manufacturing of disposable diapers involve a highly complex, high speed continuous
process assembly operation using specialized machines. The incumbents have already
incurred high sunk cost while the new entrants have not, which gives them an advantage.
● High R&D and Distribution costs- All the incumbents spent hefty amounts on R&D to
customize the product and find low cost alternatives. Any significant change in the diaper
itself requires additional adjustments in the highly specialized diaper machines. Moreover
the new entrant will not have already established distribution channels and would require
huge costs in order to incentivize retailers to push their products into stores.
● High Competition - Given the strong position of P&G in industry and increasing
demand, a variety of competitors had emerged. The industry is fragmented with a lot of
branded as well as local players.
● Economies of Scale - Since the industry is characterized by high manufacturing and
fixed cost, it is crucial for a firm to reap the benefits of economies of scale through an
increased level of production. The already established firms are operating at beyond the
minimum efficient scale and thus have a substantial cost advantage over smaller entrants.

The most sustainable entry barrier can be the large setup costs followed by high R&D costs. This
is because manufacturing is at the core of the industry and any new entrant would need
sophisticated machinery to start the production which requires huge investment. Moreover, the
industry is highly competitive and hence demands continuous improvement in the product
through R&D.

Cost Advantage of P&G-

1. P&G’s high focus on R&D gives it an edge in terms of quality and cost of production.
 2. Enjoys benefits of economies of scale as its brand pampers has large consumer demand,
which enables low cost of production per unit.
3. Strongest distribution and shipping network reduces transportation cost.

Q2. What are the various mobility barriers that exist in this industry? Identify the strategic
groups in this industry?

There are various mobility barriers that exist in the disposable diaper industry within different
strategic groups. These mobility barriers are mainly defined by two broad aspects:
● Specialized resources which include material & machines: Some resources are so
specialized that they cannot be used across strategic groups, and are rather unique to one
particular group providing it competitive advantage.
1. In this industry, players belonging to different strategic groups have invested in
costly equipment, for instance in branded groups Kimberly-Clark had an addition
of one diaper machine every month, using its unique fluff pulp absorbent
technology. Similarly, J&J also invested heavily in costly machines,
manufacturing and distribution facility. Thus machines acted as a very strong
mobility barrier to shift within strategic groups.
2. There were also moderately high mobility barriers in the materials being used
which were again specialized to each player in the strategic group. For instance,
urban carbide had developed a unique patented inner and outer liner (plastic
based) for its diapers, acting as a mobility barrier.
● High capital requirements - A move from one strategic group like the private labels
(who produce cheap quality diapers) to another like the branded firms would require
additional capital outlay to match the quality and scale of production.
● Distribution channels: A change in strategy would require additional channels to sell the
product which can be achieved through incentivizing the retailers and developing
transportation facilities.
The firms can be clubbed into strategic groups based on the similarity of the development
strategy chosen by them.
 1. Branded Companies - The price of these companies ranged between 5.3¢ to 5.7¢ per
diaper. The firms in this segment produced a range of diapers which included newborn,
daytime, overnight and toddler sizes. Their main strategic focus was to compete on
quality and brand value and hence focused heavily on R&D. Kimberly-Clark, Johnson &
Johnson, P&G and Kendall/ Colgate are the major branded companies in the industry.
2. Branded-In Test market - These players were still in the phase of testing their diapers
to gauge the quality and changes to be made in the product, if any. Their strategic focus
was on innovation.
a. Union Carbide - Had a unique, patented hydrophobic plastic inner liner that kept
babies drier than other brands.
b. Scott Paper - Experimented with two-piece disposable diaper that was much
cheaper and priced between 2.5¢ to 3.5¢ per diaper.
3. Private Label - The price 10%-12% below the leading branded diapers. Their strategy
was to target the slightly lower income segment and hence supplied a cheaper product
with an inferior quality as compared to the branded ones in the industry. The major
players in this segment were Weyerhaeuser, IPCO Hospital Supply and Georgia-Pacific.

Q3. How should P&G defend entry of other players in the market? What are the credible
commitments it can make so that entrants can modify their plans?

The entry of new firms in an industry are limited mainly by two types of barriers: structural &
strategic. Structural barriers exist when the incumbent firms enjoy certain natural advantages
such as cost or scale benefits or other favorable regulations, are usually inherent in the industry
and not in the control of the incumbents. The strategies adopted by the incumbents to deter the
entry of new firms are grouped under strategic barriers. Thus, if P&G wants to defend entry of
other players in the market, it needs to proactively make use of these strategic barriers.

1. P&G is a large multinational company with vast amount of resources. To limit the entry
of new entrants, P&G can go for limit pricing. In this, an incumbent firm reduces the
price to a level which scares away any new company contemplating entry as the new
entrant would have to keep the prices even at a lower level, thus, eliminating possibility
 of making profits. However, such threats can appear to be short term if not backed by
credible commitments. To make the threat credible, P&G requires information
asymmetry. Thus, if it reduces price, it should ensure other players are under the
impression that the price drop is long term backed by some technological advancement.

2. Bundling the products strategically: P&G has an inherent advantage as it has a diverse
portfolio of products & it usually enjoys a high market share in most of the industries it
operates in. The products can be divided into Laundry and cleaning products, Personal
care products, Food products & others. P&G can bundle its disposable diapers with any
other related product in which it enjoys a monopoly and sell them at a price which is less
than what consumers would have to pay if they buy the products separately.

Q4. How do you expect the evolution of this industry? What should P&G do in the
evolution of the industry?

● The competition will grow fierce over time which will lead to a drive for innovation in
the industry. Firms will try to gain competitive advantage by employing advanced
technology and exploring new distribution channels.
● More varieties of diapers based on size, age, time of day etc. i.e., based on different
stages of child development, and additional versions tailored as per specific needs for
particular purposes will be designed.
● This industry can see a major evolution by venturing in the adult diapers segment, P&G
rather than waiting for another player to leverage on this idea should in fact develop and
fastly implement plans to gain first mover advantage.
● Other areas of evolution would include changing marketing strategy by associating brand
with strong social messages or selling through new channels of distribution, like
investing in digital storefronts.

What Should P&G do?

P&G being the market leader, the company has a huge incumbency advantage. They are already
heavily investing in R&D, have established good supplier relations, have won the consumer
loyalty and have a huge manufacturing base. With all these strengths, they should now consider
expanding Pampers beyond the geographies of USA. International markets will be emerging
soon, P&G will have to be fast in order to establish brand loyalty. The company should also
explore more channels of distribution, to be able to serve larger customer base. Basically, they
will have to adopt innovation, tailor marketing strategies and expand globally to command their
market place.

Q5. What are your key learnings from this module?

This module depicted how business decisions evolve over time, and how the dynamics of
competition moulds the entry and exit strategies that a firm decides to play by. The importance
of distinction between new and diversifying entrants is brought about as they affect the choice of
an appropriate strategic response. Whether entry barriers exist or not, is determined by the
analysis of sunk costs and post entry competition. Structural entry barriers exist due to
incumbent’s existing foothold in the market, like exploiting the umbrella branding effect, control
over important resources, or having patents for products and processes that function at the heart
of the industry. Strategic entry barriers are devised by the incumbents to deter entry, achieved
through limit pricing, predatory pricing, or strategic bundling. A mere threat of entry can lead the
incumbent to lower the prices, which implies that the market is highly contestable. There are
various entry deterring tactics, and their effectiveness varies according to the situations in which
they are applied.
Cross-boundary disruptions, or diversifications, are affected by both company, and industry level
conditions. These disruptions often require the companies to stretch well beyond their core
competencies, and rigorously spot new opportunities.
The strategies of doing business in emerging economies are different from those of the
developed economies, and identifying these differences and acting according to them is what
leads to the success of the entrants into emerging economies. The entrants have an option to
either adapt their strategies, change their current context, or stay away from the market entirely,
after an assessment of the various institutional voids - political and social system, labor, product
and capital markets, and the degree of openness of the economies.