Disposable Diaper Industry

Group 9
PGP/20/215 Joji S Pramod
PGP/20/238 Shilpa Agarwal
PGP/20/312 Akhtar Shahi
Qureshi
PGP/20/321 Ashik P Shetty
PGP/20/323 Dilip Kumar L
Entry Barrier for Union Carbide and Johnson and Johnson

Manufacturing Process Advertising

There was a huge variety of Diapers that P&G was

Very difficult to achieve economies of scale in lesser time as offering
designing one requires $2 Million

P&G has locked up premier hospitals, as a part of

sampling
P&G has mastered the process of Diaper making with a
single machine making a maximum of 400/Min
Top players are engaged in extensive test
marketing through out the year
P&G and K-C had 80 and 20 machines respectively in
operation
The marketing expenses of P&G was $8.9 Million
per year to make Pampers as a national brand
Total estimated output of P&G and K-C were 15.77 Billion and
2.7 Billion units per year respectively, which was difficult to The Advertisement expenditure over a period of 1966-
match 73 is 4 times its nearest rival K-C
Entry Barrier for Union Carbide and Johnson and Johnson

Supplier Integration Distribution

Top manufacturers integrated in fluffy pulp because of

increasing prices
In 1974, P&G was the only player which could take
benefit of full-carload and even trainload shipments

Weyerhaeuser, only player fully integrated in fluff

pulp, P&G could fulfill requirements partially
With 4 & 5 Operating plants top two players could
reduce the transportation cost easily

Purchasing scale did not help much in savings

Cost Structure (1973)
P&G K-C J&J
Particulars
Raw Materials
Cost per unit Unit Cost
Fluff Pulp
Cover sheet
0.006
0.005
0.006
0.005
0.006
0.005
comparison for
Backing sheet
Packaging
0.001
0.003
0.001
0.003
0.001
0.003 P&G K-C and
Manufacturing Labour
Dep & Maintenance
Utilities
0.003
0.001
0.001
0.003
0.0014
0.0014
0.003
0.0030
0.0030
Johnsons
Total Manufacturing Costs 0.02 0.0209 0.0240
Freight 0.004 0.004 0.004
S&G,Admin Expenses 0.006 0.006 0.006
Pre tax profit 0.01 0.0091 0.0060
Assumptions
Selling Price (manufacturers) 0.04 0.04 0.04
Profit Margin 25% 23% 15% Selling Price is constant for all the 3
Yearly Production of diapers companies
per plant 62,89,92,000 43,61,01,120 20,96,64,000 The output rate of Machine used by
J&J will have the basic capacity as it is
Ouput rate of machines 375 260 125 installed only in 1973
Machine Cost 1200000 1200000 4000000
Building Cost and Utilities cost are
Building cost 1800000 1800000 1800000
Total Investment 3000000 3000000 5800000
fixed irrespective of the company
Total Fixed Cost 1257984 1257984 1845043.2 Except for depreciation and utilities, all
Depreciation p.a. 628992 628992 1216051.2 other costs are variable costs and are
Utilities 628992 628992 628992 fixed per unit
No of years to depreciate the
investment 4.77 4.77 4.77
Industry defining factors
Spent $10 Transportation cost is almost
million/year on R&D 10% of selling price
P&G able to operate 24 hour
a day at 80% efficiency

Manufacturing
R&D Cost and and
productivity Distribution
cost

Consumer
Advertising
Loyalty
Strategy
towards brand
Private label products Complex process , involve a
were inferiors variety of vehicles
400 regional player but Target hospitals with trial
handle only 7% cloth sample to get new customers
diapers in 1966
P&Gs Defense Strategy
Economics of Scale and High Production rate
More than 80 machine unit in 4 operating plants while K-C have only
20 machines in 5 operating plants
Operate 24 hour a day at 80% efficiency
Through put is 350-400 diapers/min while average machine
generate 100-150 diapers/min

Intense marketing and advertising

Invest almost 9 million on media advertising in 1973 which was
much higher than other players
Sampling in hospitals to acquire new customers.
Variety of product provided by P&G was highest

Manufacturing Capacity (1973)

P&G K-C J&J
Output rate of machines 350-400/min 250-275/min 100-150/min

Annual Sales rate per $5.5-$6.0 $4.0-$4.5

machine million million
Market share 69% 17% 2%
P&Gs Defense Strategy
Distribution
Only P&G was able to reap benefits of full-carload and trainload
shipment which reduce transportation cost.
P&G provide wide rang of products so it was easy to transport it
diapers with other product using truck efficiently
Able to capture significant shelf space

Legal barriers and R&D cost

P&G engineers were able to achieve 400 diapers/min in 1966
Spend huge amount on R&D with new products, more
frequently with respect to the competitors
P&G delayed entry of J&J because of patent dispute.
Strategies Competitors can adopt
Strategy to be Strategy to be incorporated
incorporated for J&J for Union Carbide

Expensive inner line products should outsourced to

reduce costs till the time J&J is completely Owing to huge financial strength of the company it
comfortable in economically producing the must enter the market with a type of alliance
products from it

J&J association with healthcare business must be It should start developing a dedicated sales force which
used to prescribe J&J products at hospital levels to could work in a B-C environment not the otherwise B-B
capture initial customers markets

Sales force of other consumer related divisions The company can indulge in aggressive pricing
especially healthcare should be pulled up for equivalent to P&G owing to its strong financials to
marketing J&J capture market

Capital expenditure should be turned to increasing Brand building into a consumer healthcare company
production scale which will lead to lowering of prices will be important if it wants to play as a dominant
due to economies of scale competitor

Exploring alliances with new entrants to grow Production as a private label player would be an easier
inorganically and capture market way to enter the market
Evolution of Diaper Industry
Industry
Private players likely to emerge in local markets. This is likely to cut market
share of incumbents
Major FMCG brands could diversify their portfolio considering the booming
diaper industry
Economies of scope achieved by incumbents act as a barrier to entrants

What P&G can do

P&G could go for globalisation and aggressive marketing in the upcoming
markets
Stronger focus on R&D and acquiring patents so that P&G would be the player
with latest product.
Acquiring firms that introduce new technology in the market at the start itself.