A Strategic Game Between Unilever and P&G In India Document Transcript

1. A STRATEGIC GAME BETWEEN UNILEVER AND PROCTER & GAMBLE IN INDIACompetition in the detergent market in India is of interest for several reasons on both a macro- and micro-economic level. On a macroeconomic level, one-sixth of the worlds population is in India. Furthermore, GDPper capita measurements indicate a steady rise in income levels in this newly industrializing nation. From amicroeconomic perspective, this paper addresses a strategic game involving price wars between two marketleaders in the detergent market, Unilever and Procter & Gamble (P&G). Lastly, ethical considerations will bediscussed as it relates to the importance of considering exogenous losers as a result of engaged players in thisstrategic games; namely, mom and pop Indian shops that sell detergent products.Unilever has had a strong, unmatched foothold in India since 1888, when it sold its first bar of soap in thecountry. As an Anglo-Dutch company, Unilever has worked hard over a period of nearly 150 years to build itsdominant position in emerging markets, such as India. The organizational success in executing this objectivesuccessfully is evident through the nearly 70-80% market share enjoyed by Unilever in the Indian detergentmarket.P&G is a direct competitor with Unilever and has been using price wars, as well as aggressive advertisingcampaigns, to whittle away at Unilevers market share. The cost of this strategy in the short run has beenpressures endured by both companys operating margins and bottom-line financial results; however, P&G hastraditionally viewed this as a viable long-term strategy. In order for the company to be successful, P&G mustbe diligent and willing to accept losses today in order to profit from potential future gains.The uphill battle faced by P&G is clear, as Unilever is an early adopter in this market, while P&G just enteredthe Indian market in 1993. To date, P&G have yet to establish the full value of their brand equity realized inother overseas markets. Strategically, the Indian market was essentially flooded by P&G with their products asan attempt to drive prices below Unilevers marginal costs. P&G has been modestly successful in obtainingcontrol of some additional market share in India over time, as Unilever has given up their once 90% marketshare held since 2004.The game in which Unilever and P&G are playing will now be explored in greater detail. Neither player hasknowledge of the others actions, as both moves simultaneously. Furthermore, each company has a strategy ofeither pricing competitively (i.e., high prices) or engaging in a price war (i.e., low prices). This game is similar,in some respects, to the Battle of the Sexes strategic game, in which the Pareto optimal move is for one playerto set high prices while the other is priced low, but both players actually want to set low prices. The Nashequilibrium in this game is one in

which is the Pareto optimal move involves asymmetric payoffs: P&Gcontinues to price their products at the low price while Unilever prices competitively. Unilever would prefer tocollude with P&G in that manner, both players would charge the high price.Nonetheless, the cost to Unilever of this market payoff is cushioned by the fact that it has a strong marketleadership position in the Indian market especially in the areas of brand recognition and customer loyalty. Inthe short run, anyway, P&Gs strategies are minimally effective in scaling additional market share at Unileversloss. Both companies lose in this game by waging a price war because it would adversely affect bothcompanies bottom lines, at least in the short run.In reality, both companies act in a somewhat surprising manner by following the strategy of rigorous pricecutting. M.S. Banga, CEO of Hindustan Lever Ltd., a subsidiary of Unilever responsible for the Indianbusiness, justifies such a scenario with a claim that reiterates Unilevers already very strong position that was 2. built up over years, as well as the companys determination to not just defend it, but to strengthen its marketshare. A.G. Lafley, CEO of P&G, highlights the fact that Unilever has been in India for many decades, and thatIndia is a region worth aggressively pursuing market entry in the longterm.Two important factors have been omitted from this game: (1) smaller competing firms; and (2) Indiascompetition policy. Obvious losers in this game would be the small mom and pop companies in India. Thesesmall players in this market have no viable alternative means of competing for any length of time in a scenariowhere the major players are engaged in a price war due to their limited capital to draw on.This begs the question of whether it is ethical (or even legal) for Unilever and P&G, as oligopolies in the Indianmarket, to engage in price wars. Unfortunately, there is a less clear or direct answer to this question. One wayto consider a possible response is to observe Indias competition policies, in which Unilever and P&G appear tobe in violation of, which gives rise to the idea that both companies may be behaving in an unethical manner.According to Indias New Competition Policy, public enterprises are charged with preventing monopolistic,restrictive, and unfair practices. Included, are practices that are exclusionary to other players by creating abarrier to new entrants or forcing existing competitors out of the market.Advocates of price wars, in the short run, would be Indian consumers because they are receiving the samequality products at a highly discounted price. Another ethical consideration may highlight the fact that manyconsumers in the Indian marketplace would otherwise have no access to quality detergent products, which are arequired good in the pursuit of an acceptable standard of living. One fact remains: this story is unfolding in realtime and many answers to these and related questions will require continued observation of the marketdynamics between Unilever, P&G, and other players in Indias detergent market.