Competition in the diaper industry raged on as Kimberly-Clark (KC) strived to stay ahead of its main competitor, Proctor and Gamble (P&G). By the end of 1989, KC’s Huggies controlled 32% of the market share—the highest of any single product competing in the diaper market. Now facing significant financial constraints, the leader in personal care products endeavored to create product improvements that would hold market share and outperform Proctor and Gamble’s Pampers. External Analysis
One political force affecting KC and the diaper industry is Congress and eleven states introducing legislation taxing, regulating or banning the sale of disposable diapers. Because disposable diapers were not biodegradable, environmentalists were concerned about millions of diapers saturating landfills and possibly contaminating groundwater. Environmentalists lobbied for diapers to be taxed or banned to prevent further environmental degradation. If laws were passed taxing or banning disposable diapers, consumers would stop buying Huggies and resort back to cloth. Possible legal restrictions severely threatened the future of the disposable diaper.
A second political factor affecting Kimberly-Clark and the diaper industry is ease of entry to European and Japanese markets. Neither Japan nor European countries imposed political sanctions and foreign regulations preventing KC from entering their markets. A final example of political/legal forces affecting the diaper industry and KC is P&G unlawfully monopolizing the diaper market and violating anti-trust laws. In 1989, Pampers (Proctor and Gamble’s premium diaper line) and Luv’s (Proctor and Gamble’s mid-price diapers) together controlled 49% of the diaper market. P&G’s violation of anti-trust laws could prevent KC from having an equal opportunity to gain market share and every percentage of market share lost would cost KC $6-10 million in profit. Because diapers accounted for 37% of Kimberly-Clark’s net income, P&G’s monopolization could significantly impact KC’s future.
An economic factor affecting Kimberly-Clark and the diaper industry is the increase in disposable income by women working outside their homes. The increase in disposable income allows KC and its competitors to successfully sell disposable diapers at premium prices.
There are several social/cultural forces affecting KC and the diaper industry, as previously mentioned, there was an increase in consumer activism. Environmentalists and environmentally concerned customers expressed concerns over disposable diapers’ potential health risks for sanitation workers and groundwater pollutants. Also, disposable diapers received harsh criticism for not being biodegradable. Landfills contained approximately 4-5.5 billion pounds of discarded diapers—nearly five percent of total volume. Environmentalists were determined to stop further pollution, which seemed inevitably detrimental to KC and other diaper manufacturers.
Another social/cultural force was an aging population. Fortunately for KC, there is a positive relationship between the number of elderly persons and the need for incontinence products. According to statisticians, 31 million North Americans were over age 65 and 10% had incontinence issues. Because Kimberly-Clark has extensive knowledge in producing diapers, feminine products, toilet paper and other paper products, they could easily create diapers for adults. A third social/cultural force is the extended amount of time children spent in diapers. The diaper extension led KC to introduce Pull-Ups, which targeted toddlers being potty-trained. Other social/cultural forces include a decrease in family size and more mothers working outside the home (mentioned above).
A technological force affecting Kimberly-Clark and the diaper industry was the introduction of super-thin technology. Super-thin technology was created by using polyacrylate, a powder crystal that absorbs 50 times its weight in liquid. The introduction of super-thin technology created more shelf space for Huggies and reduced shipping costs (more diapers fit in a truck). A second technological factor is industry spending on R&D. P&G and KC spent approximately $110 million annually on Research and Development. As previously mentioned, every percent of market share gained equals $6-10 million in profit. Kimberly-Clark and its competitors worked to create breakthrough inventions that would steal customers away from Proctor and Gamble.
A third technological force affecting KC and the diaper industry is patent protection. Due to heightened competiveness in the industry, P&G and KC took strenuous efforts to protect their technology from competitors. KC and P&G were extremely suspicious of one another and frequently sued over use of proprietary technologies (gains from lawsuits were negligible).
Some of the political/legal, economic, social/cultural and technological forces are similar in other parts of the world. For example, a social/cultural force in Japan and Western European countries is the changing role of women. Like North America, the number of Japanese and Western European women working outside the home increased. Unlike Western and Japanese women, Southern Europe had few mothers working outside the home. A social/cultural trend in Japan that is frequent diaper changes. Japanese parents change their children twice as often as North Americans. Also, Japanese avoided the use of non-biodegradable plastics.
Forces that drive industry competition are threat of new entrants, rivalry among existing firms, threat of substitute products or services, bargaining power of buyers and bargaining power of suppliers. The most important forces are rivalry among existing firms and threat of new entrants. The five forces are discussed separately below.
Some factors that affect the threat of new entrants are product differentiation, capital requirements, access to distribution channels and economies of scale. Kimberly-Clark sought to differentiate itself from competitors through extensive advertising. It used coupons, commercials and product placement to convince customers that Huggies are the best diapers. It used product placement by showing customers that even baby Elizabeth in “Baby Boom” wears Huggies diapers. Successful advertising campaigns created a high barrier of entry to new firms hoping to enter the market.
Another factor that prevented new competition from entering the market is high capital requirement. The machines used to produce diapers cost between $2-4 million and were several feet long. New firms that lacked capital to purchase machines would automatically be barred from competition. Access to distribution channels also affected the threat of new entrants. Retailers created their own mid-priced/lower market diapers and were often reluctant to give shelf space to competing firms (in the mid/low price segment). Retailers’ ability to earn profit margins on their own products outweighed revenue from firms purchasing shelf space. A final factor that prevented new entrants is economies of scale. Large companies, such as KC and P&G, created similar products and could take advantage of existing distribution channels, resources and facilities. Overall, threat of new entrants in favorable.
Factors affecting rivalry among existing firms include the number of competitors, rate of industry growth, capacity, fixed costs, product or service characteristics and height of exit barriers. The number of firms competing in the diaper industry is relatively low. P&G and KC are the only firms competing in the premium diaper market and control 81% of market share. Other firms and retailers compete in the lower price segment; however, they target a different audience than premium diaper manufacturers. A second factor contributing to rivalry among existing firms is rate of industry growth. Because birthrate is declining, there is little market share to be gained. Therefore, market share cannot be gained unless taken away from competitors. Rivalry among competition is unfavorable.
A third factor affecting rivalry is capacity. Kimberly-Clark and its competitors must operate their plants at full capacity to lower unit costs. They also have regional plants in multiple locations to reduce transportation costs. Another factor affecting rivalry is the amount of fixed costs. Diapers are expensive to produce, market and sell, as previously mentioned, machines cost between $2-4 million. Height of exit barriers also influences rivalry. Exit barriers are low. Throughout Huggies’s existence, many firms have entered and left the diaper market. For example, Johnson & Johnson, Borden, Scott and International Paper all unsuccessfully created diapers.
Some factors that contribute to threat of substitute products or services are cloth diapers and two piece diaper systems. Increased environmental concerns led some customers to choose to dress their babies in cloth diapers as opposed to disposable. Initially, cloth diapers were seen as more environmentally friendly do to their reusable nature. Cloth diapers posed a serious threat to disposable diapers until KC and P&G convinced customers that cloth was more detrimental to the environment (laundering cloth diapers created ten times more water pollution). Another substitute for disposable diapers is the two-piece diapers created by Fischer-Price and Gerber. Threat of substitute products or services is somewhat unfavorable for firms in the diaper industry.
Bargaining power of buyers was influenced by the buyers’ ability to integrate backwards, margins from diaper sales and brand-names. Many of the retailers that sold Kimberly-Clark’s diapers also created their own lines sold at lower prices. Another factor contributing to the bargaining power of buyers is the low profit-margins retailers made off diaper sales. Over one-third of KC’s revenue came from diaper sales. Brand loyalty decreased the bargaining power of buyers. Parents with young children may only shop at places that sell the kind of diapers their baby wears. If the retailer chooses not to sell diapers, it could lose business. Bargaining power of buyers is unfavorable for the diaper industry.
Bargaining power of suppliers is affected by inability to integrate forward and technology. As previously mentioned, super-thin technology was achieved by using polyacrylate. Unfortunately for KC and P&G, only one firm, Cellanese, had a license to make polyacrylate in the United States. Substitutes for polyacrylate were not readily available, so Kimberly-Clark and its competitors were dependent upon a single firm for super-thin technology. Cellanese had significant supplier power over its buyers. It could control price increases and business deals. Although Cellanese could make polyacrylate, they did not have the ability to integrate forward. Cellanese was a chemical firm and diaper production was not one of its competencies. Inability for supplier to integrate forward is favorable for KC. The bargaining power of suppliers is unfavorable for firms in the diaper industry.
When evaluating the external environment, it is important for firms to recognize opportunities and threats. Some opportunities are a large un-served mid-price market, changing demographics and priorities of North American women, Japanese markets, expansion into Southern Europe, aging population and new technology. Threats include Japanese companies consider global expansion, rising environmental concerns, saturated disposable diaper market and declining birthrate. Each opportunity and threat’s application to Kimberly-Clark is described below.
Seventy-five percent of new mothers in the 1980 are working outside the home. Families began to value time over money and were more willing to pay premium prices for quality diapers. Also, the decrease in family size increased the amount of money that could be spent on diapers. This is an opportunity because it allowed KC to successfully sell Huggies at premium prices. A third opportunity for Kimberly-Clark is Japanese markets. Selling Huggies in Japanese markets is an opportunity because they had not reached the same level of maturity as North American markets. Also, as previously mentioned, Japanese babies use twice as many diapers than Americans. The Japanese market was comparable in size to the North American market. Expansion into Southern Europe is an opportunity for growth due to the low penetration levels and unsophisticated competitors. In 1989, there was no large European industry leader. KC has the potential to become the leading diaper distributer in Europe if they execute successful marketing campaigns.
An aging population is an opportunity for KC to increase its incontinence product sales. Sales for 1990 were estimated to exceed $1 billion due to the increase in people over age 65. In the future, the incontinence market is projected to become more profitable than diapers. A final opportunity for Kimberly-Clark is new technology. Utilizing and taking advantage of new technology is an opportunity because it allows KC to outperform P&G and regain market share.
A threat that affects Kimberly-Clark is Japanese companies consider global expansion. Japanese expanding globally would hurt KC because Japanese diaper technology is years ahead of North American. Japanese companies, specifically KAO and Unicharm, create biodegradable diapers. Due to recent environmental concerns, KC would lose market share to Japanese companies if they penetrate the North American market. Rising environmental concerns are a threat to Kimberly-Clark because environmentalists feared potential health risks for sanitation workers and ground water contamination. They were lobbying to ban disposable diapers and pushing for consumers to use cloth diapers instead. Kimberly-Clark could lose customers to environmentally-friendly diapers if they do not create a biodegradable diaper. Another threat to KC is a saturated disposable diaper market. A saturated disposable diaper market is a threat to KC due to little growth in the diaper industry. The only market share to be gained must be taken away from competitors. A final threat to KC and the diaper industry is the declining birthrate. A declining birthrate and decrease in family size is positively related to a decrease in diaper sales.