MKC3130 - Strategic Issues in Marketing Sverre Gunnersen

29 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 Products

Narrow - Shavers, including double-edged blades, disposables, and “systems” blades

Gillette expects to sell 108m units of double-edged blades, 10m units of disposables and
18m units of systems blades. Gillette’s market share is expected to be 50% in 1996, so
there 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 by
15%. 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 the
Product Life Cycle.

1.1.2 Structure

Rivalry - Low
Gillette’s market share is expected to reach 50% in 1996. Having such a strong monopoly
results 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, however
as 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 to
charge, 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 the
market 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.
MKC3130 - Strategic Issues in Marketing Sverre Gunnersen
29 July 2003 Student #: 13043692

1.2. Environmental
Indonesia is a highly separated country, both geographically and culturally, making
distribution difficult. Indonesia also has a growing balance of wealth, and growing
centralisation of population. Foreign investment has recently been liberalised. Regulation
forces products sold to be produced locally to some degree, preventing the adoption of
more 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 derived
demand, 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 students
and graduates entering the workforce.

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

“Problems with customs clearance”, relating to Gillette’s women’s razor, “could impact the
entire 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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MKC3130 - Strategic Issues in Marketing Sverre Gunnersen
29 July 2003 Student #: 13043692

Threats
• Lower priced products, more suited to the Indonesian income brackets, stealing
market share

3. Objectives
Gillette’s Indonesian objectives are to increase the Indonesian market for blades, while
maintaining profit growth.

4. Problem Analysis
Gillette has recently increased prices to maintain increases in profit, but this has resulted
in a 2% growth of unit sales in the face of a market share that is increasing in the order of
30%.

Promotion does not appear to be of a concern, as they have 97% brand awareness, while
they certainly have some production issues these appear to be in the process of being
solved. Gillette’s distribution solution doesn’t seem to have any major problems, leaving
only 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 to
purchase 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 a
reduction of profit from operations from 20% to 10%. However, if costs were reduced by
giving less trade discounts and reducing advertising to 6%, net profits could be stabilised
at approximately 18%. This 2% loss represents a $640,000 loss if present unit sales were
met. It is proposed that this 10% reduction in price will result in an increase of sales of
approximately 5%, representing an increase in profit of $900,000, and an increase in
market share of 5%.

If this alternative were to be successful, more severe cost reduction mechanisms and price
reductions 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 that
competitors will see this as a major threat at this time. However, as discussed previously,

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

the threat of new entrants is very real, and this move will not be drastic enough to
eliminate 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 major
changes in the company’s structure. Two weeks should be enough time for management
to 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 of
competing based on price. This strategy may not sit comfortably with management,
however management must realise that no matter how valued the Gillette brand is, the
Indonesian economy is not in a state where western brand name concepts can be fully
exploited.

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%, to
15%, that sales would increase by 2%. This hypothesis is supported by the reasoning that
the market grew by 30%, yet Gillette’s unit sales only increased by 19%, representing an
11% “loss” of customers had Gillette not changed its pricing. Furthermore, Gillette is
already 55% of the populations most preferred brand, therefore an increase in promotional
spending may increase this somewhat, and also increase Gillette’s brand awareness by
another 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 the
need of customers who cannot afford Gillette products, an increase in spending on
promotion would likely not be of concern to competitors, who’s competitive advantage lies
in price.

5.2.3 Time Horizon

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

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

5.2.4 Congruency with managerial predispositions

As it is management that is suggesting this alternative, it is expected to be very congruent

with their predispositions.

5.3. Do Nothing
Opting to accept the current marketing plan and continue with it will allow Gillette to float
on the growth of the marketplace, providing that no competitors enter to fill the needs of
unsatisfied customers. As growth of the marketplace is somewhere in the order of 30%, it
is likely that Gillette can expect similar growth providing that the other elements of the
marketing mix remain the same.

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

6. Recommended Strategy
As “5.1 Cut Costs & Reduce Prices” results in both increased profits and increased market
share, it is the alternative that is suggested.

It should be noted that the success of this alternative is dependant on the assumption that
the 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 its
benchmarking 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 been
outlined in this report, but will need to be executed to ensure the increased profitability of
the alternative.

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