week 8 - case study - gillette indonesia

MKC3130 - Strategic Issues in Marketing Sverre Gunnersen29 July 2003 Student #: 13043692

WEEK 8 - CASE STUDY - GILLETTE INDONESIA

1. Current Situation and Trends

1.1. Market

1.1.1 Definition, Size and Growth

Broad - Personal Grooming ProductsNarrow - Shavers, including double-edged blades, disposables, and “systems” blades

Gillette expects to sell 108m units of double-edged blades, 10m units of disposables and18m units of systems blades. Gillette’s market share is expected to be 50% in 1996, sothere is an existing market of double-edged blades of 116m.

The >$10k income bracket has grown by 30%, the $5k-$10k bracket by 15% and the $2k-$5k bracket by 3%. The only bracket to reduce in size is the <$2k bracket, decreasing by15%. Also the incidence of shaving is increasing, and lacks far behind that of Hong Kong.This evidence suggests that the shaving market is in the early stages of growth on theProduct Life Cycle.

1.1.2 Structure

Rivalry - Low

Gillette’s market share is expected to reach 50% in 1996. Having such a strong monopolyresults in a high concentration ratio, signifying low rivalry.

Threat of Substitutes - High, moving to Med/High

There is a strong threat of substitutes coming from the use of wet or dry knives, howeveras Indonesia becomes more westernised this is expected to decrease.

Buyer Power - Low

As Gillette has such a large portion of the market, buyer power is comparably low.

Supplier Power - Medium/High

As a result of financial constraints from buyers, Gillette is limited in what they are able tocharge, moderating their power within the market.

Threat of New Entrants - High

The market being quite new results in a high threat of new entrants, especially when themarket is experiencing such growth. Also double-edged blades are quite simple devices,and thus the set-up costs for their manufacture would be comparatively low.


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1.2. Environmental

Indonesia is a highly separated country, both geographically and culturally, makingdistribution difficult. Indonesia also has a growing balance of wealth, and growingcentralisation of population. Foreign investment has recently been liberalised. Regulationforces products sold to be produced locally to some degree, preventing the adoption ofmore efficient imported products.

1.3. Competition

• Double-edged Blades - imported inferior products from Eastern Europe and China.Tatra, Super Nacet, Tiger.

• Disposables - Bic (US), Bagus (local) - low sales volumes• Premium - Schick - Gillette has a 90% market share in this product segment

1.4. Customers

Gillette’s direct customers are distributors, however Gillette has always focused on deriveddemand, the increase of demand from end-users to increase demand from distributors.For this reason, end-users have been focused on as Gillette’s customers.

In the Indonesian market, Gillette’s market is males’ over 18, especially College studentsand graduates entering the workforce.

1.5. Internal

Gillette Indonesia has decreased production time from 7 days to 3, however the addition ofline capacity has been delayed and will result in overtime being required.

“Problems with customs clearance”, relating to Gillette’s women’s razor, “could impact theentire manufacturing cycle”.

2. Key Issues

Strengths

• 50% Market Share• 97% Brand Awareness, and 55% brand most used ratings

Weaknesses

• 19% volume increase in market that has increased approximately 30%.• Inability to meet demand for the coming year, until the new capacity is implemented

Opportunities

• Capitalise on growth of income within Indonesia to increase sales• Increase demand for higher end, higher margin products


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Threats

• Lower priced products, more suited to the Indonesian income brackets, stealingmarket share

3. Objectives

Gillette’s Indonesian objectives are to increase the Indonesian market for blades, whilemaintaining profit growth.

4. Problem Analysis

Gillette has recently increased prices to maintain increases in profit, but this has resultedin a 2% growth of unit sales in the face of a market share that is increasing in the order of30%.

Promotion does not appear to be of a concern, as they have 97% brand awareness, whilethey certainly have some production issues these appear to be in the process of beingsolved. Gillette’s distribution solution doesn’t seem to have any major problems, leavingonly price as the problem element of the current marketing mix.

Gillette’s position seems to be one of “waiting” for the customers to earn enough money topurchase their products, paving the way for a clever competitor to steal market share.

5. Alternatives

5.1. Cut Costs & Reduce Prices

5.1.1 Costs and Benefits

Gillette currently has a gross margin of 46%. Reducing prices by 10% would result in areduction of profit from operations from 20% to 10%. However, if costs were reduced bygiving less trade discounts and reducing advertising to 6%, net profits could be stabilisedat approximately 18%. This 2% loss represents a $640,000 loss if present unit sales weremet. It is proposed that this 10% reduction in price will result in an increase of sales ofapproximately 5%, representing an increase in profit of $900,000, and an increase inmarket share of 5%.

If this alternative were to be successful, more severe cost reduction mechanisms and pricereductions could be introduced in the future.

5.1.2 Competitor Reactions

As Gillette’s products will still be priced far above the main competitors, it is unlikely thatcompetitors will see this as a major threat at this time. However, as discussed previously,


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the threat of new entrants is very real, and this move will not be drastic enough toeliminate the threat of not meeting the pricing needs of the target market.

5.1.3 Time Horizon

The introduction of the new pricing scheme and reduction of costs involves no majorchanges in the company’s structure. Two weeks should be enough time for managementto finalise the changes, which would likely be phased in over the folllowing month.

5.1.4 Congruency with managerial predispositions

Gillette prides itself on its brand name and advertising selling its product, instead ofcompeting based on price. This strategy may not sit comfortably with management,however management must realise that no matter how valued the Gillette brand is, theIndonesian economy is not in a state where western brand name concepts can be fullyexploited.

5.2. Increase Promotion

The alternative is to increase promotion, as proposed by Effio.

5.2.1 Costs and Benefits

It is suggested that if the promotion budget were to be increased from its current 12%, to15%, that sales would increase by 2%. This hypothesis is supported by the reasoning thatthe market grew by 30%, yet Gillette’s unit sales only increased by 19%, representing an11% “loss” of customers had Gillette not changed its pricing. Furthermore, Gillette isalready 55% of the populations most preferred brand, therefore an increase in promotionalspending may increase this somewhat, and also increase Gillette’s brand awareness byanother percent, but this would not result in a large increase in sales.

This alternative represents an expenditure of $966,000, and an increase in gross profit of$360,000 - a $606,000 net loss.

5.2.2 Competitor Reactions

As Gillette’s competitors in the Indonesian marketplace are low end, whom exist to fill theneed of customers who cannot afford Gillette products, an increase in spending onpromotion would likely not be of concern to competitors, who’s competitive advantage liesin price.

5.2.3 Time Horizon

The compilation and execution of the increased promotional budget would be expected totake no longer than a month to begin having an effect on Gillette’s customers.


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5.2.4 Congruency with managerial predispositions

As it is management that is suggesting this alternative, it is expected to be very congruentwith their predispositions.

5.3. Do Nothing

Opting to accept the current marketing plan and continue with it will allow Gillette to floaton the growth of the marketplace, providing that no competitors enter to fill the needs ofunsatisfied customers. As growth of the marketplace is somewhere in the order of 30%, itis likely that Gillette can expect similar growth providing that the other elements of themarketing mix remain the same.

However, doing so leaves Gillette Indonesia vulnerable to the threats outlined in the aboveSWOT analysis.

6. Recommended Strategy

As “5.1 Cut Costs & Reduce Prices” results in both increased profits and increased marketshare, it is the alternative that is suggested.

It should be noted that the success of this alternative is dependant on the assumption thatthe lack of growth experienced by Gillette was primarily caused by the increase in price,and not be another factor. Fortunately the alternative suggested is not drastic, so itsbenchmarking and control can be performed in an environment with reduced risk.

This alternative also involves the reduction of costs, the details of which have not beenoutlined in this report, but will need to be executed to ensure the increased profitability ofthe alternative.

week 8 - case study - gillette indonesia

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