In the 1960s Procter & Gamble recognized that disposable diapers could be made a
ID: 420852 • Letter: I
Question
In the 1960s Procter & Gamble recognized that disposable diapers could
be made a mass- market product and developed techniques to produce diapers
at high speed and correspondingly low cost. The result was that it
dominated the market. According to Harvard’s Michael Porter, who made
a careful study of this industry, the following were some ways in which
Procter & Gamble might have signaled other firms to deter entry.
Tactic
Cost to P&G
Cost to an Entrant
1. Signal a commitment to
defend position in diapers
through public statements,
comments to retailers, etc.
None
Raises expected cost of
entry by increasing probability and extent of
retaliation.
2. File a patent suit. Legal fees Incurs legal fees plus the
probability that P & G wins
the suit with subsequent
cost to the competitor.
Legal fees
Incurs legal fees plus the
probability that P & G wins
the suit with subsequent
cost to the competitor.
3. Announce planned
capacity expansion.
None
Raises expected risk of
price- cutting and the probability of P & G’s retaliation to entry.
4. Announce a new
generation of diapers
to be introduced in the
future.
None
Raises the expected cost of
entry by forcing entrant to
bear possible product development and changeover costs
contingent on the ultimate
configuration of the new
generation.
a. In considering these possible tactics, why should managers at Procter &
Gamble be concerned about their costs?
b. Why should managers be concerned with the costs to an entrant?
c. By the 1990s Procter & Gamble had to compete with high- quality,
private- label diapers (as well as with Kimberly- Clark, which successfully
entered the market in the 1970s). In March 1993 its Pampers brand had
about 30% of the market, and its Luvs brand had about 10%. The price of
Luvs and Pampers exceeded that of discount brands by over 30%. Should
Procter & Gamble have cut its prices?
d. In 1993 Procter & Gamble sued Paragon Trade Brands, a private- label
producer, alleging infringement of two patents. Are lawsuits of this kind
part of the process of oligopolistic rivalry and struggle?
Tactic
Cost to P&G
Cost to an Entrant
1. Signal a commitment to
defend position in diapers
through public statements,
comments to retailers, etc.
None
Raises expected cost of
entry by increasing probability and extent of
retaliation.
2. File a patent suit. Legal fees Incurs legal fees plus the
probability that P & G wins
the suit with subsequent
cost to the competitor.
Legal fees
Incurs legal fees plus the
probability that P & G wins
the suit with subsequent
cost to the competitor.
3. Announce planned
capacity expansion.
None
Raises expected risk of
price- cutting and the probability of P & G’s retaliation to entry.
4. Announce a new
generation of diapers
to be introduced in the
future.
None
Raises the expected cost of
entry by forcing entrant to
bear possible product development and changeover costs
contingent on the ultimate
configuration of the new
generation.
Explanation / Answer
a) Managers at P&G should be concerned about their costs as the cost of operations and production cost reduce the profit margin earned by the comapny. As the ultimate objective of any firm is profit maximization, that is to earn maximum profit year after year, incurring any cost reduce their profit margin and thus affecting the profit sharing percentage amongst the owners of the firm.
b) Managers should be concerned with the costs to an entrant as it poses a barrier to the entry of the new entrants. If the costs to an entrant is high, the new entrant would not be interested to enter in the industry and it acts as a barrier to the entry of the new firm. Firms are interested in making the costs to an entrant high so as to reduce the potential competition in the market.
c) As the diapers industry is highly competitive and P&G is competing with private labeled diapers which are of low price compared to P&G, so P&G should definitely have to cut down its price otherwise it will have a large reduction in its customer base as customers would switch to the competitor's product which are of low price.
d) In case of oligopolistic market, there are few players in the market and each one of them try to distinguish their product so as to capture the maximum market share. So P&G can file a lawsuit in order to reduce the competitive rivalry.
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