Strategic Analysis Of The External Environment Currently Facing Gillette Marketing Essay

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1st Jan 1970 Marketing Reference this

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1. Abstract

Purpose – The objective of this report is to conduct an extensive analysis of the external environment and evaluate the key drivers influencing the corporate strategic management of Proctor & Gamble’s brand, Gillette. It will concentrate on identifying, categorising and prioritising the key issues facing this organisation both in the macro-environment and the micro-environment.

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Methodology – The tools used in this report to provide an external analysis of the key environmental forces and competitive drivers include; analytical frameworks such as the PESTEL framework, and Porter’s 5-forces analysis. In addition an analysis of strategic groups and sources of competition will be included.

Findings – The influence of political, economic, social, technological, environmental and legal drivers in the macro-environment, combined with the issues from the micro-environment, provide a series of implications for competitive action and strategic choice in the future. In the current external environment, social-trends and technological aspects play a vital role in a company’s success in the Shaving Razor industry.

Value – The report utilises appropriate theory, conceptual frameworks and academic literature on future strategies and scenarios for Gillette from an analytical perspective.

2. Introduction

This report will define Gillette as assembling and marketing its products within in the Shaving Razor industry, a distinct category of the Beauty & Personal Care sector. Regardless of the period of growth the industry, valued at £523 million, has benefitted from in recent years, Mintel (2009) suggested that sales of shaving and depilatory products had dropped by an estimated 3%. (Lee, 2010) proposes the industry faces cash-conscious consumers who may be seeking to reduce the cost of expensive razor blades or ensure they last for a longer period of time. However, (Bottomley, 2010) suggests a different reason for the decrease, even the most gadget- obsessed male is likely to question the value of on-board microchips and precision trimmers, when there are simpler, high-quality products available for a fraction of the price. Another point of view from (Jefferson, 2010) who suggests perhaps it is the functional approach that companies within this industry present to customers, connecting with customers on a more emotional level will remedy the predictable perceptions of ‘two blades are better than one, three blades are better than two’ and so on.

The object of this report is to provide a structure focusing on future trends that can help to analyse strategic choices available to companies in the Shaving Razor industry. It will provide an extensive external environmental analysis of the current Shaving Razor environment with a future-trend perspective, using the PESTEL (political, economic, social, technological, environmental, legal) framework (see, for example, Brooks et al., 2005, p.7) as a suitable analytical tool for the macro-environment. The report will draw out and highlight the key drivers which are most likely to influence the future development of the industry. The report will then focus on Porter’s five forces framework, which (Porter, 1980) referred these forces as the micro-environment, which will then be used to establish the competitive intensity and therefore the overall industry profitability. Finally the report will analyse strategic groups and sources of competition within the Shaving Razor industry.

3. PESTEL Analysis of the Shaving Razor Industry

The external environment consists of the external environment forces which may influence an aspect of organisational activity. These are defined within six broad-ranging sections with the acronym PESTEL, political, economic, social, technological, environmental and legal. A full PESTEL analysis of the Shaving Razor environment is provided in Table 1, however the report has identified, categorised and prioritised the key issues facing the industry from the macro-environment below.

Among the key conclusions of the PESTEL analysis are the following:

With consumer purchases increasingly dependant on the often neglected topic of social responsibility, (Shayrn, 2009; Trainer, 2005) suggest that over the coming years, even in today’s tough economic times, consumers demand an urgency about making their communities more environmentally friendly, fairer and sustainable. In the future, as environmental issues become increasingly reported in the media, (Kraus, 2005) implies the consumer will not only consider the impact their purchases have, but having a corporate social responsibility will be compulsory to remain competitive. In the Shaving Razor industry, this refers to using environmentally-friendly materials, long-lasting performance, environmentally-friendly packaging, CO2 emissions. See for example, Bic’s new environmentally friendly shaving razor (BicEcolutions, 2010).

As the industry provides an essential product, that the majority of males require on an international basis. It is common for companies in this industry to operate and distribute globally. (Anwar et al, 2009) suggested that each country has individual rules on taxation and custom duties which may distort the company’s pricing policies, a contradiction in pricing may cause people to purchase stock in bulk from countries with minimal price and black market the company’s products, which would have a negative effect on profitability and brand reputation.

The Shaving Razor industry take advantage of around a 4750% mark up according to (Poulter, 2009) who suggests that insiders have revealed that replacement razors blades cost only 5p to make yet are sold for around £2.50 each. This extortionate mark-up on compatibility costs has caught the attention of the Office of Fair Trading who are currently investigating the issue. (The Office of Fair Trading, 2010) refers to this type of issue under the name compatibility costs, these purchase decisions ‘lock’ a consumer in with inexpensive original equipment (durables) in order to purchase follow-on products which a substantial profit is made on (consumables).

The high value-to-size ratio offered by the Shaving Razor industry has triggered the products offered by Shaving companies to become the worlds most shoplifted product according to (The Telegraph, 2003; BBC News, 2010). Kopalchick and Monk (2005, p.70) proposed this caused several companies in the Shaving Razor industry to take action and incorporate Radio-Frequency Identity (RFID) tags, which automatically tracks the products location when it is removed from the shelf. However, with the technology available today, e.g. GPS systems; it would be possible to track the product from leaving the shelf to its eventual disposal, which has led to ethical disputes regarding personal privacy according to (The Star Phoenix, 2006).

There is an ongoing legal battle within in the Shaving Razor industry, examples of this are evident in (New York Times, 2004, p4; Grand Rapid Press, 2003, p11; BBC news, 2006). The series of disputes refer to company slogans, advertising campaigns, design patents regarding razor heads with more blades and trademarks according to (Solley, 2005). Each legal battle has costs both in money, time and to some extent brand reputation.

The UK government has ordered an increase in value added tax (VAT) from 17.5% to 20%, this will take place on the 4th January 2011 (HM Revenue & Customs, 2011). The increase will trigger an increase in material costs, meaning a higher price needs to be charged to customers in order to maintain the same profit levels per unit. According to (The Guardian, 2010) several companies have already made plans to increase their prices and many companies are waiting to see what action competitors take, while some companies have chosen to absorb the increase. (The Western Mail, 2011) reports that many companies believe that if they absorb the VAT increase, they will attract more customers and be able to compete more effectively in the marketplace. This suggests that Shaving Razor companies who absorb the VAT increase may experience more increased custom than those who choose to pass on the rise in costs to customers.

Political

Economic

Social

Technological

Environmental

Legal

Each country has individual rules on taxation and custom duties which may distort the company’s pricing policies. Contradiction in pricing may cause people black market the companies products.a

The VAT increase from 17.5% to 20% will raise material costs throughout the industry and the UK.b

Continued growth trend in industry value (£523 million), however estimated 3% decrease in 2009.c

Recession had minimal effect on spending habits within this industry, few people have spend less on shaving products. However, value of sales has dropped, due to heavy promotional discounting.c

Price increase due to high demand in premium disposable shaving systems. d

Brand loyalty is high within the industry, however one in ten users experiment with new brands and formats. Quality and performance are the key factors relating to whether the user switches to the new brand or format.c

Cultural and religious factors that prevent people from shaving. In addition, the media popularisation of Movember, a fund-raising event to raise money to fight prostate cancer.e

Demographic changes e.g. the increasing aging of population, who statistically shave less often.f

Changing social attitudes. Rise in male grooming sales suggests men are more conscious with the way they look.g

Introduction of high-end products last longer, meaning they have to be replaced less frequently, reducing sales.h

High-quality premium product with additional USP’s e.g. indicator that tells customers when blades need to be replaced; means a higher price can be charged.i

Use of JIT and ICT within industry can reduce wastage and ensure the manufacture is more efficient.h

Consumer purchases increasingly dependant on the often neglected topic of social responsibility.j

The disposal of the dangerous razor blades is a key issue, previously ‘Blade banks’ were provided as promotional material. It is a joint responsibility between manufacturer and customer to ensure the dangerous affect to the environment is minimised k

Depilatories – A Possible Threat to Shaving Systems.l

There is an ongoing legal battle within the Shaving Razor industry. The series of disputes refer to company slogans, advertising campaigns, design patents regarding razor heads with more blades and trademarks.m

Replacement shaving razor heads have become the world’s most shoplifted product.n

Many companies within the industry have incorporated RFID tags into packaging to automatically monitor products from shelf to disposal, however this has led to ethical disputes regarding personal privacy.o

Office of fair trading are investigating the high compatibility costs currently charged by companies in the industry., putting the present 4750% mark-up at jeopardy.p

Sources: a(Ricciuto, 2001); b(The Guardian, 2010; HM Revenue & Customs, 2010); c(Mintel, 2009); d(The Times 100, 2010); e(Mandal, 2003); f(Gale,2008); g(Verdon, 2007); h(Greb, 2009); i(Kruger,1998); j(Shayrn, 2009; Trainer, 2005); k (Kostigen, 2008) l(Global Industry Analysts, 2010); m (Solley, 2005; New York Times, 2004, p.4;BBC news, 2006) n(The Telegraph, 2003); o(The Star Pheonix, 2006); p(Poulter, 2009; The Office of Fair Trading, 2010).

4. 5-Forces Analysis of the Shaving Razor Industry

Porter’s five forces framework can enable companies to analyse key forces that will affect the industry from the micro-environment and determine competitive intensity and consequently the overall industry profitability. According to (Porter, 1980) the five main forces include three from ‘horizontal’ competition: threat of substitution, threat from established rivals and threat from new entrants. The two remaining forces are from ‘vertical’ competition: bargaining power of suppliers and bargaining power of customers. The diagram below identifies, categorises and prioritises the key issues facing Gillette in the micro-environment. A more detailed exposition of the competitive intensity and industry profitability follows in the next sections.

Diagram 1 – Key Drivers facing Gillette in the micro-environment

4.2 Threat Of Substitution

The level of threat from substitution depends on several factors, the key factors are; relative quality and price, customer’s willingness to substitute and the costs involved with switching to a substitute. In Gillette’s case the main substitutes would be in the form of electric razors, straight traditional razors, depilatories and the option of not shaving.

The threat of substitution from electric razors is minimized as Gillette owners, Proctor & Gamble, have an arm in this industry with their successful brand Braun. The (Chain Drug review, 2008) suggests that older men tend to prefer electric razors; however the younger generation would lean towards purchasing wet-shaving products which are offered by Gillette. This could be interpreted that there is a potential reduction of the threat of substitution with electric razors in the future.

Another substitute is the traditional straight-edge razor. This type of product operates in a very niche market. According to (Smith, 2010) these types of shavers have been fading in popularity due to their dangerous nature, suggesting the threat from this substitute is minimal.

Depilatories are chemical agents used to temporarily remove hair at the skins surface. According to (Tuckington & Dover, 2007) depilatories offer a smoother skin surface than shaving, however only 1% of American women use such products. It is also suggested that this is due to the fact depilatories are expensive, slow and irritating to the skin.

The alternative substitute of not shaving is often combated by the industry’s clever marketing techniques, which often suggest it is not socially acceptable not to shave. (Cavallaro, 2008) suggested methods and techniques in which are most effective to market products to men; these methods are used by many companies to advertise effectively. (Birchall, 2009, p.9) suggested Gillette’s recent advertising campaigns were framed as ‘an affirmation of body shaving as masculine’. The messages portrayed through these advertising campaigns are manipulated to benefit the company, and draw customers away from purchasing substitutes.

4.3 Threat From Established Rivals

The intensity of the rivalry from established competition is reliant on; the structure of competition, industry costs, degree of differentiation, switching costs, strategic objectives and exit barriers.

The industry Gillette operates in is already unattractive; it contains many powerful and aggressive competitors who have high stakes in staying in the segment, due to high exit barriers. These conditions lead to frequent price wars, advertising disputes, and new, innovative product introductions, making it expensive for Gillette to maintain a high market share. The threat from established rivals is limited by the strong image and brand loyalty Gillette maintains. In addition, Gillette’s innovative research and development department keeps the industry thriving by generating differentiation and technological advances. Their success has caused established rivals to borrow from their $1 billion research and development efforts (McCullough, 2003).

4.4 Threat From New Entrants

The level of threat from new entrants to the Shaving Razor industry is established by; economies of scale, investment requirements, customer switching costs, access to industry distribution channels, access to technology, brand loyalty, chances of retaliation from existing industry members, government regulations.

In the Shaving Razor industry, (Mintel, 2009) suggested there are high levels of brand loyalty present. This makes the industry very unattractive for new entrants, as they would be directly pitting against several major competitors in an oligopoly. Gillette minimises the threat from new entrants by efficient usage of economies of scale advantages, access to the industry’s distribution channels and access to technology enhancements. Another key factor affecting the threat from new entrants is the risk of retaliation by Gillette, which could be substantial and could include mergers or acquisitions, an example of this is when Proctor & Gamble acquired Gillette for £30.2bn (BBC News, 2005).

Entry to the Shaving Razor industry also involves high set-up costs and exit barriers are also high, reducing the probability of successfully securing finance from external sources, increasing the difficultly for new entrants for this industry.

4.5 Bargaining Power of Suppliers

The negotiating power from supplies it determined by; concentration of suppliers, supplier branding, profitability of suppliers, threat of suppliers forward integrating into industry, buyers threat of backward integration into supply, buyers level of importance to suppliers profitability, switching supplier costs.

As Gillette manufactures its own products, there is minimal effect from this source. Gillette maintains a win-win relationship with its suppliers of raw-materials as they can be obtained from anywhere and little supplier switching costs would be incurred. (Evans, 2008) suggested that Gillette identifies suppliers with a proven ability to meet its specifications. Once a supplier is selected to participate, Gillette expects them to produce a pre-production planning system to assess the supplier’s capability to deliver Gillette’s specifications. This high level of capability Gillette demands from its raw-materials supplier shows that he supplier has little power in the business relationship and there is minimal threat. In addition, as a large global brand it can establish a powerful supply-chain management model and global competitiveness enables supplier’s prices to be driven low.

4.6 Bargaining Power of Customers

The level of bargaining power from customers relies on; the concentration of competition, differentiation and unique selling points, profitability of companies, threat of backward or forward integration into the industry, cost of customers switching to competitor.

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Buyers in the Shaving Razor industry possess strong and growing bargaining power. With Wal-Mart as the main retailer for Gillette’s products, the conclusion drawn could be that the potential profitability can become shortened as Gillette has a high reliance on Wal-Mart and similar large retailers for a large proportion of revenue. (DePamphilis, 2010) outlined suppliers such as Gillette have been under considerable pressure from retailers, due to the on-going growth of Wal-Mart and industry mergers, for example Sears and Kmart. DePamphilis then goes on to suggest Wal-Mart is responsible for 13% of Gillette income is 2005, suggesting a high-reliance on the retailer for profitability, increasing the threat of bargaining from customers. The buyer’s power increased due to the fact Shaving Razors represents a significant fraction of the retailer’s costs and the products are undifferentiated. In addition, the buyers in this industry are price sensitive. (Chopra et al, 2010) outline that Gillette’s pricing power is being further eroded by channel migration and increasing consumer resistance to paying significantly higher prices for innovation.

5. Strategic Groups in the Shaving Razor industry

A key concept used in strategic management practice, (Hunt, 1972) defined strategic groups as grouping companies within an industry that have similar interests, business models or similar combinations of strategies. Gillette faces intense competition in most markets, its products compete with highly marketed, well-known, branded products. The Gillette’s performance in this industry depends on the brand’s ability to adapt itself within this kind of competitive environment.

Price-Quality Segment

Name Of Parent Co.

(Brand market share for Gel 7 oz–$/Units–in parenthesis)

P&G (Gillette) [1] 

P&G

(other brands)

S.C. Johnson

Johnson & Johnson

Beiersdorf

AG

Perio

Super-premium

Neutrogena Razor Defense Gel [2] 

(2.5/1.5%)

Premium

Gillette Fusion

Hydra Gel

(14.3/11.5%)

Aveeno Gel [3] 

(10/6.7%)

Mid-price

Gillette Mach 3 Gel (4.5/4.4%)

Gillette Series Gel

(20/22.9%)

Edge Gel

(34/35.9%)

Nivea Gel (6.5/6.2%)

Economy

Noxzema [4] Gel

(1.9/2.7%)

Old Spice [5] Gel

(0.5/0.7%)

Barbasol Gel

(0.4/0.6%)

Gillette, Bic, Shick-Wilkinson Sword King of shaves

Conclusion – Opportunities and Threats

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1. Abstract

Purpose – The objective of this report is to conduct an extensive analysis of the external environment and evaluate the key drivers influencing the corporate strategic management of Proctor & Gamble’s brand, Gillette. It will concentrate on identifying, categorising and prioritising the key issues facing this organisation both in the macro-environment and the micro-environment.

Methodology – The tools used in this report to provide an external analysis of the key environmental forces and competitive drivers include; analytical frameworks such as the PESTEL framework, and Porter’s 5-forces analysis. In addition an analysis of strategic groups and sources of competition will be included.

Findings – The influence of political, economic, social, technological, environmental and legal drivers in the macro-environment, combined with the issues from the micro-environment, provide a series of implications for competitive action and strategic choice in the future. In the current external environment, social-trends and technological aspects play a vital role in a company’s success in the Shaving Razor industry.

Value – The report utilises appropriate theory, conceptual frameworks and academic literature on future strategies and scenarios for Gillette from an analytical perspective.

2. Introduction

This report will define Gillette as assembling and marketing its products within in the Shaving Razor industry, a distinct category of the Beauty & Personal Care sector. Regardless of the period of growth the industry, valued at £523 million, has benefitted from in recent years, Mintel (2009) suggested that sales of shaving and depilatory products had dropped by an estimated 3%. (Lee, 2010) proposes the industry faces cash-conscious consumers who may be seeking to reduce the cost of expensive razor blades or ensure they last for a longer period of time. However, (Bottomley, 2010) suggests a different reason for the decrease, even the most gadget- obsessed male is likely to question the value of on-board microchips and precision trimmers, when there are simpler, high-quality products available for a fraction of the price. Another point of view from (Jefferson, 2010) who suggests perhaps it is the functional approach that companies within this industry present to customers, connecting with customers on a more emotional level will remedy the predictable perceptions of ‘two blades are better than one, three blades are better than two’ and so on.

The object of this report is to provide a structure focusing on future trends that can help to analyse strategic choices available to companies in the Shaving Razor industry. It will provide an extensive external environmental analysis of the current Shaving Razor environment with a future-trend perspective, using the PESTEL (political, economic, social, technological, environmental, legal) framework (see, for example, Brooks et al., 2005, p.7) as a suitable analytical tool for the macro-environment. The report will draw out and highlight the key drivers which are most likely to influence the future development of the industry. The report will then focus on Porter’s five forces framework, which (Porter, 1980) referred these forces as the micro-environment, which will then be used to establish the competitive intensity and therefore the overall industry profitability. Finally the report will analyse strategic groups and sources of competition within the Shaving Razor industry.

3. PESTEL Analysis of the Shaving Razor Industry

The external environment consists of the external environment forces which may influence an aspect of organisational activity. These are defined within six broad-ranging sections with the acronym PESTEL, political, economic, social, technological, environmental and legal. A full PESTEL analysis of the Shaving Razor environment is provided in Table 1, however the report has identified, categorised and prioritised the key issues facing the industry from the macro-environment below.

Among the key conclusions of the PESTEL analysis are the following:

With consumer purchases increasingly dependant on the often neglected topic of social responsibility, (Shayrn, 2009; Trainer, 2005) suggest that over the coming years, even in today’s tough economic times, consumers demand an urgency about making their communities more environmentally friendly, fairer and sustainable. In the future, as environmental issues become increasingly reported in the media, (Kraus, 2005) implies the consumer will not only consider the impact their purchases have, but having a corporate social responsibility will be compulsory to remain competitive. In the Shaving Razor industry, this refers to using environmentally-friendly materials, long-lasting performance, environmentally-friendly packaging, CO2 emissions. See for example, Bic’s new environmentally friendly shaving razor (BicEcolutions, 2010).

As the industry provides an essential product, that the majority of males require on an international basis. It is common for companies in this industry to operate and distribute globally. (Anwar et al, 2009) suggested that each country has individual rules on taxation and custom duties which may distort the company’s pricing policies, a contradiction in pricing may cause people to purchase stock in bulk from countries with minimal price and black market the company’s products, which would have a negative effect on profitability and brand reputation.

The Shaving Razor industry take advantage of around a 4750% mark up according to (Poulter, 2009) who suggests that insiders have revealed that replacement razors blades cost only 5p to make yet are sold for around £2.50 each. This extortionate mark-up on compatibility costs has caught the attention of the Office of Fair Trading who are currently investigating the issue. (The Office of Fair Trading, 2010) refers to this type of issue under the name compatibility costs, these purchase decisions ‘lock’ a consumer in with inexpensive original equipment (durables) in order to purchase follow-on products which a substantial profit is made on (consumables).

The high value-to-size ratio offered by the Shaving Razor industry has triggered the products offered by Shaving companies to become the worlds most shoplifted product according to (The Telegraph, 2003; BBC News, 2010). Kopalchick and Monk (2005, p.70) proposed this caused several companies in the Shaving Razor industry to take action and incorporate Radio-Frequency Identity (RFID) tags, which automatically tracks the products location when it is removed from the shelf. However, with the technology available today, e.g. GPS systems; it would be possible to track the product from leaving the shelf to its eventual disposal, which has led to ethical disputes regarding personal privacy according to (The Star Phoenix, 2006).

There is an ongoing legal battle within in the Shaving Razor industry, examples of this are evident in (New York Times, 2004, p4; Grand Rapid Press, 2003, p11; BBC news, 2006). The series of disputes refer to company slogans, advertising campaigns, design patents regarding razor heads with more blades and trademarks according to (Solley, 2005). Each legal battle has costs both in money, time and to some extent brand reputation.

The UK government has ordered an increase in value added tax (VAT) from 17.5% to 20%, this will take place on the 4th January 2011 (HM Revenue & Customs, 2011). The increase will trigger an increase in material costs, meaning a higher price needs to be charged to customers in order to maintain the same profit levels per unit. According to (The Guardian, 2010) several companies have already made plans to increase their prices and many companies are waiting to see what action competitors take, while some companies have chosen to absorb the increase. (The Western Mail, 2011) reports that many companies believe that if they absorb the VAT increase, they will attract more customers and be able to compete more effectively in the marketplace. This suggests that Shaving Razor companies who absorb the VAT increase may experience more increased custom than those who choose to pass on the rise in costs to customers.

Political

Economic

Social

Technological

Environmental

Legal

Each country has individual rules on taxation and custom duties which may distort the company’s pricing policies. Contradiction in pricing may cause people black market the companies products.a

The VAT increase from 17.5% to 20% will raise material costs throughout the industry and the UK.b

Continued growth trend in industry value (£523 million), however estimated 3% decrease in 2009.c

Recession had minimal effect on spending habits within this industry, few people have spend less on shaving products. However, value of sales has dropped, due to heavy promotional discounting.c

Price increase due to high demand in premium disposable shaving systems. d

Brand loyalty is high within the industry, however one in ten users experiment with new brands and formats. Quality and performance are the key factors relating to whether the user switches to the new brand or format.c

Cultural and religious factors that prevent people from shaving. In addition, the media popularisation of Movember, a fund-raising event to raise money to fight prostate cancer.e

Demographic changes e.g. the increasing aging of population, who statistically shave less often.f

Changing social attitudes. Rise in male grooming sales suggests men are more conscious with the way they look.g

Introduction of high-end products last longer, meaning they have to be replaced less frequently, reducing sales.h

High-quality premium product with additional USP’s e.g. indicator that tells customers when blades need to be replaced; means a higher price can be charged.i

Use of JIT and ICT within industry can reduce wastage and ensure the manufacture is more efficient.h

Consumer purchases increasingly dependant on the often neglected topic of social responsibility.j

The disposal of the dangerous razor blades is a key issue, previously ‘Blade banks’ were provided as promotional material. It is a joint responsibility between manufacturer and customer to ensure the dangerous affect to the environment is minimised k

Depilatories – A Possible Threat to Shaving Systems.l

There is an ongoing legal battle within the Shaving Razor industry. The series of disputes refer to company slogans, advertising campaigns, design patents regarding razor heads with more blades and trademarks.m

Replacement shaving razor heads have become the world’s most shoplifted product.n

Many companies within the industry have incorporated RFID tags into packaging to automatically monitor products from shelf to disposal, however this has led to ethical disputes regarding personal privacy.o

Office of fair trading are investigating the high compatibility costs currently charged by companies in the industry., putting the present 4750% mark-up at jeopardy.p

Sources: a(Ricciuto, 2001); b(The Guardian, 2010; HM Revenue & Customs, 2010); c(Mintel, 2009); d(The Times 100, 2010); e(Mandal, 2003); f(Gale,2008); g(Verdon, 2007); h(Greb, 2009); i(Kruger,1998); j(Shayrn, 2009; Trainer, 2005); k (Kostigen, 2008) l(Global Industry Analysts, 2010); m (Solley, 2005; New York Times, 2004, p.4;BBC news, 2006) n(The Telegraph, 2003); o(The Star Pheonix, 2006); p(Poulter, 2009; The Office of Fair Trading, 2010).

4. 5-Forces Analysis of the Shaving Razor Industry

Porter’s five forces framework can enable companies to analyse key forces that will affect the industry from the micro-environment and determine competitive intensity and consequently the overall industry profitability. According to (Porter, 1980) the five main forces include three from ‘horizontal’ competition: threat of substitution, threat from established rivals and threat from new entrants. The two remaining forces are from ‘vertical’ competition: bargaining power of suppliers and bargaining power of customers. The diagram below identifies, categorises and prioritises the key issues facing Gillette in the micro-environment. A more detailed exposition of the competitive intensity and industry profitability follows in the next sections.

Diagram 1 – Key Drivers facing Gillette in the micro-environment

4.2 Threat Of Substitution

The level of threat from substitution depends on several factors, the key factors are; relative quality and price, customer’s willingness to substitute and the costs involved with switching to a substitute. In Gillette’s case the main substitutes would be in the form of electric razors, straight traditional razors, depilatories and the option of not shaving.

The threat of substitution from electric razors is minimized as Gillette owners, Proctor & Gamble, have an arm in this industry with their successful brand Braun. The (Chain Drug review, 2008) suggests that older men tend to prefer electric razors; however the younger generation would lean towards purchasing wet-shaving products which are offered by Gillette. This could be interpreted that there is a potential reduction of the threat of substitution with electric razors in the future.

Another substitute is the traditional straight-edge razor. This type of product operates in a very niche market. According to (Smith, 2010) these types of shavers have been fading in popularity due to their dangerous nature, suggesting the threat from this substitute is minimal.

Depilatories are chemical agents used to temporarily remove hair at the skins surface. According to (Tuckington & Dover, 2007) depilatories offer a smoother skin surface than shaving, however only 1% of American women use such products. It is also suggested that this is due to the fact depilatories are expensive, slow and irritating to the skin.

The alternative substitute of not shaving is often combated by the industry’s clever marketing techniques, which often suggest it is not socially acceptable not to shave. (Cavallaro, 2008) suggested methods and techniques in which are most effective to market products to men; these methods are used by many companies to advertise effectively. (Birchall, 2009, p.9) suggested Gillette’s recent advertising campaigns were framed as ‘an affirmation of body shaving as masculine’. The messages portrayed through these advertising campaigns are manipulated to benefit the company, and draw customers away from purchasing substitutes.

4.3 Threat From Established Rivals

The intensity of the rivalry from established competition is reliant on; the structure of competition, industry costs, degree of differentiation, switching costs, strategic objectives and exit barriers.

The industry Gillette operates in is already unattractive; it contains many powerful and aggressive competitors who have high stakes in staying in the segment, due to high exit barriers. These conditions lead to frequent price wars, advertising disputes, and new, innovative product introductions, making it expensive for Gillette to maintain a high market share. The threat from established rivals is limited by the strong image and brand loyalty Gillette maintains. In addition, Gillette’s innovative research and development department keeps the industry thriving by generating differentiation and technological advances. Their success has caused established rivals to borrow from their $1 billion research and development efforts (McCullough, 2003).

4.4 Threat From New Entrants

The level of threat from new entrants to the Shaving Razor industry is established by; economies of scale, investment requirements, customer switching costs, access to industry distribution channels, access to technology, brand loyalty, chances of retaliation from existing industry members, government regulations.

In the Shaving Razor industry, (Mintel, 2009) suggested there are high levels of brand loyalty present. This makes the industry very unattractive for new entrants, as they would be directly pitting against several major competitors in an oligopoly. Gillette minimises the threat from new entrants by efficient usage of economies of scale advantages, access to the industry’s distribution channels and access to technology enhancements. Another key factor affecting the threat from new entrants is the risk of retaliation by Gillette, which could be substantial and could include mergers or acquisitions, an example of this is when Proctor & Gamble acquired Gillette for £30.2bn (BBC News, 2005).

Entry to the Shaving Razor industry also involves high set-up costs and exit barriers are also high, reducing the probability of successfully securing finance from external sources, increasing the difficultly for new entrants for this industry.

4.5 Bargaining Power of Suppliers

The negotiating power from supplies it determined by; concentration of suppliers, supplier branding, profitability of suppliers, threat of suppliers forward integrating into industry, buyers threat of backward integration into supply, buyers level of importance to suppliers profitability, switching supplier costs.

As Gillette manufactures its own products, there is minimal effect from this source. Gillette maintains a win-win relationship with its suppliers of raw-materials as they can be obtained from anywhere and little supplier switching costs would be incurred. (Evans, 2008) suggested that Gillette identifies suppliers with a proven ability to meet its specifications. Once a supplier is selected to participate, Gillette expects them to produce a pre-production planning system to assess the supplier’s capability to deliver Gillette’s specifications. This high level of capability Gillette demands from its raw-materials supplier shows that he supplier has little power in the business relationship and there is minimal threat. In addition, as a large global brand it can establish a powerful supply-chain management model and global competitiveness enables supplier’s prices to be driven low.

4.6 Bargaining Power of Customers

The level of bargaining power from customers relies on; the concentration of competition, differentiation and unique selling points, profitability of companies, threat of backward or forward integration into the industry, cost of customers switching to competitor.

Buyers in the Shaving Razor industry possess strong and growing bargaining power. With Wal-Mart as the main retailer for Gillette’s products, the conclusion drawn could be that the potential profitability can become shortened as Gillette has a high reliance on Wal-Mart and similar large retailers for a large proportion of revenue. (DePamphilis, 2010) outlined suppliers such as Gillette have been under considerable pressure from retailers, due to the on-going growth of Wal-Mart and industry mergers, for example Sears and Kmart. DePamphilis then goes on to suggest Wal-Mart is responsible for 13% of Gillette income is 2005, suggesting a high-reliance on the retailer for profitability, increasing the threat of bargaining from customers. The buyer’s power increased due to the fact Shaving Razors represents a significant fraction of the retailer’s costs and the products are undifferentiated. In addition, the buyers in this industry are price sensitive. (Chopra et al, 2010) outline that Gillette’s pricing power is being further eroded by channel migration and increasing consumer resistance to paying significantly higher prices for innovation.

5. Strategic Groups in the Shaving Razor industry

A key concept used in strategic management practice, (Hunt, 1972) defined strategic groups as grouping companies within an industry that have similar interests, business models or similar combinations of strategies. Gillette faces intense competition in most markets, its products compete with highly marketed, well-known, branded products. The Gillette’s performance in this industry depends on the brand’s ability to adapt itself within this kind of competitive environment.

Price-Quality Segment

Name Of Parent Co.

(Brand market share for Gel 7 oz–$/Units–in parenthesis)

P&G (Gillette) [1] 

P&G

(other brands)

S.C. Johnson

Johnson & Johnson

Beiersdorf

AG

Perio

Super-premium

Neutrogena Razor Defense Gel [2] 

(2.5/1.5%)

Premium

Gillette Fusion

Hydra Gel

(14.3/11.5%)

Aveeno Gel [3] 

(10/6.7%)

Mid-price

Gillette Mach 3 Gel (4.5/4.4%)

Gillette Series Gel

(20/22.9%)

Edge Gel

(34/35.9%)

Nivea Gel (6.5/6.2%)

Economy

Noxzema [4] Gel

(1.9/2.7%)

Old Spice [5] Gel

(0.5/0.7%)

Barbasol Gel

(0.4/0.6%)

Gillette, Bic, Shick-Wilkinson Sword King of shaves

Conclusion – Opportunities and Threats

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