The Price War

Setting and changing prices are key strategic marketing
decisions. Setting the right price for a product or service can be
the key to success or failure. In this activity we see how the
competition for the diaper market among Kimberly-Clark, P&G,
and the smaller companies illustrates the increasing importance of
price as a competitive tool and how price competition changes the
structure of a market.

Whether the orientation is toward control over end prices or net
prices, company policy relates to the net price received. Cost and
market considerations are important; a company cannot sell goods
below cost of production and remain in business, and it cannot sell
goods at a price unacceptable in the marketplace. Firms unfamiliar
with overseas marketing and firms producing industrial goods orient
their pricing solely on a cost basis. Firms that employ pricing as
part of the strategic mix, however, are aware of such alternatives
as market segmentation from country to country or market to market,
competitive pricing in the marketplace, and other market-oriented
pricing factors, including cultural differences in perceptions of
pricing. Some approaches to international pricing include full-cost
pricing, variable-cost pricing, skimming, and penetration
pricing.

Read the case below and answer the questions that
follow.

The battle between Procter & Gamble and Kimberly-Clark has
brought Pampers and Huggies, respectively, to places they have
never been, forcing down diaper prices worldwide, and expanding the
global market for disposable diapers. A battle in Brazil between
the two giants gives an interesting glimpse of the global markets
of tomorrow. Disposable diapers are still considered a luxury by
the vast majority of Brazil’s 194 million people, whose average
annual income is under $8,000. Before P&G and Kimberly arrived,
rich and poor alike generally made do with cloth or nothing at all.
The disposables that were available were expensive, bulky, and
leaky.

When less than 5 percent of the Brazilian mass market used
disposable diapers, P&G launched Pampers Uni, a no-frills,
unisex diaper. Before Uni, it cost more to pay for disposable
diapers than to pay for a maid to wash the cloth ones. The
introduction of the relatively cheap, high-quality Uni
fundamentally changed the economics of the diaper market for most
middle-class Brazilians.

The plan was to put such nonessentials as disposable diapers
within the reach of millions of Brazilians for the first time. At
the same time, the Brazilian economy was on the upswing—inflation
had subsided, and overnight, the purchasing power of the poor
increased by 20 percent. Low-priced products flew off the shelves.
P&G had to truck in diapers from Argentina as it struggled to
open new production lines.

But the good days did not last. Kimberly-Clark entered the
market and began importing Huggies from Argentina. With the help of
a Unilever unit as its Brazilian distributor, Kimberly-Clark gained
immediate distribution across the country and quickly made deep
inroads into the market. Unilever agreed to work with
Kimberly-Clark because its archrival in soap was P&G, and
Kimberly-Clark’s archrival in diapers was P&G. The two
companies previously had entered into a global alliance to look for
win–win situations when it was in both their best interests to
partner and help each other, from a competitive standpoint, against
the dominant P&G. The Brazilian market was the perfect case for
cooperation.

With Unilever’s help, Kimberly-Clark “push girls” invaded
markets to demonstrate the diaper’s absorption. Sales rose rapidly
and began to exceed production. To increase market share,
Kimberly-Clark formed an alliance with Kenko do Brazil, P&G’s
largest home-grown rival, and created the “Monica” brand. “Monica’s
Gang,” a comic strip similar to “Peanuts” in the United States,
sells widely in Brazil. São Paulo malls were crowded with thousands
of kids waiting to get an Easter photo taken with actors in Monica
suits, an honor that required the purchase of three packs of
diapers. Monica diapers were a big hit, and Kimberly-Clark became
number one in the Brazilian market.

It was a tough blow to P&G. The company had devoted an
entire page of its annual report to how Pampers Uni had tripled its
market share in Brazil, helping P&G “retain the number one
position in a market that has grown fivefold.” Now it suddenly
found itself on the defensive. First it cut prices, a step P&G
loathes. “Price cutting is like violence: No one wins,” said the
head of its Brazilian operation. Then it broadened its product
range, rolling out an up-market diaper called Super-Seca, priced 25
percent higher than Pampers Uni. Later, in a flanking move, it also
unveiled Confort-Seca, a bikini-style diaper originally developed
for Thailand and priced 10 to 15 percent lower than the
already-inexpensive Uni.

Kimberly-Clark fired back, matching the price cut and then
introducing a cheaper version of Monica called Tippy Basic. Four
weeks later, P&G cut prices another 10 percent on Super-Seca
and Confort-Seca. Despite the price cuts, the two brands were still
relatively expensive; then a wave of really cheap diapers arrived.
Carrefour, a French retailer that is now Brazil’s biggest
supermarket chain, sells crudely made Bye-Bye Pipi diapers from
Mexico. Despite their inferior quality, the cheap imports pulled
down diaper prices across the board.

The real war started when lower prices became so attractive that
consumers who otherwise could not afford diapers came into the
market. As prices continued to drop, the market grew; that
attracted more producers, which were mostly small, local Brazilian
companies that offered even lower-priced competitive diapers. One
such company, Mili, saw its market share increase from 4.8 percent
to 16.2 percent over a three-year period. What accounts for growth
of these smaller companies? One analyst suggests that the
multinationals are too sophisticated and, thus, too expensive for
the Brazilian market: “Smaller companies are just supplying what
consumers need at a price they can afford.” But it also can be said
that as prices drop, products become more attractive to a larger
segment of the total market.

Sources: Raju Narisetti and Jonathan Friedland, “Disposable
Income: Diaper Wars of P&G and Kimberly-Clark Now Heat Up in
Brazil,” The Wall Street Journal, June 4, 1997, p. A1;
“Brazil: Procter & Gamble Increased Market Share,” SABI (South
American Business Information), May 31, 2000; Jonathan Birchall,
“New Tactics in the Battle for Babies’ Bottoms,” Financial
Times, http://www.FT.com, August 24, 2006. For more
information, see Kimberly-Clark’s Web site at
http://www.kimberly-clark.com, and Procter & Gamble’s at
http://www.pg.com; also see Matthew Bird and Rosabeth Moss Kanter,
“Procter & Gamble Brazil (A): 2 ½ Turnarounds,” Harvard
Business School Cases, January 1, 2008, for details about the
firms’ decision-making approaches.

1. Which of the following was true of the Brazilian market for
disposable diapers prior to the entry of Procter & Gamble and
Kimberly?

A- Disposable diapers were an essential item for a majority of
the households in Brazil.

B- Disposable diapers sold in the market were of reasonably good
quality.

C- People from low income groups could afford to buy
diapers.

D- Disposable diapers that were available in the market were
expensive.

E- There were plenty of good brands to choose from.

2. Procter & Gamble, with the launch of Pampers Uni, changed
the economics of the diaper market for Brazilians by

A- launching a luxury product, targeting mainly upper middle
class Brazilians.

B- establishing an alliance with Kimberly-Clark to market its
new line of diapers.

C- making diapers a nonessential product for consumers in the
Brazilian market.

D- launching expensive diapers as the purchasing power of the
people increased.

E- introducing relatively cheap, high-quality diapers for the
Brazilian market.

3. “With Unilever’s help, Kimberly-Clark “push girls” invaded
Brazilian markets. To increase market share, Kimberly-Clark formed
an alliance with Kenko do Brazil, and created the “Monica” brand.
Monica diapers were a big hit, and Kimberly-Clark became number one
in the Brazilian market. This was a tough blow to P&G.” Which
of the following actions did P&G take as a result of this stiff
competition from other brands?

A- It introduced a cheaper version of the Monica brand called
Tippy Basic.

B- It formed an alliance with Kenko do Brazil, the largest
diaper brand in Brazil.

C- It introduced Pampers Uni, a first of its kind, no-frills,
unisex diaper.

D- It launched an inexpensive diaper called Super-Seca.

E- It cut down prices of its diapers and broadened its product
range.

4. The continued price war between Procter & Gamble and
Kimberly-Clark in the Brazilian market for disposable diapers, and
the eventual entry of new firms, is likely to have led to which of
the following outcomes?

A- New firms entering this market primarily targeted upper class
Brazilians with premium products.

B- The overall prices of disposable diapers increased.

C- The market for disposable diapers in Brazil shrank in
size.

D- New consumers, who found disposable diapers too expensive
earlier, were now able to enter the market.

E- The level of competition in this market was substantially
reduced.

5. The battle between Procter & Gamble and Kimberly-Clark in
the Brazilian market for diapers led to the growth of local
Brazilian diaper companies. Which of the following was true of the
products offered by these new firms?

A- They were expensive, bulky, and leaky.

B- There was very limited demand for the diapers offered by
these new firms.

C- Their introduction caused a phenomenal rise in diaper prices
in Brazil.

D- They were low priced competitive diapers.

E- They were of a much higher quality than the diapers offered
by Procter & Gamble.