Entry barriers for J&J and Union

Carbide for National Expansion

Control of
essential
resources

P&G threatened patent

action against J&J to deter
its entry in diaper business
P&Gs Buckeye Cellulose
division produced fluffy
pulp
P&G had human resources
capable of making highly
sophisticated machinery
(achieved production rate
of 400 pieces per minute

2Economies of
scale and
scope

Marketing
advantages
of
incumbency

P&G was the incumbent

leader in the diaper market
in 1966 and started
national expansion of
Pampers
P&G was a leader in
consumer products in the
US and its products
provided umbrella effect to
Pampers
P&G advertised Pampers
heavily with extensive
sampling and couponing

Only P&G can reap full

benefits of full car load and
even rail roads shipment in
1974 Transportation cost
is 10% of the overall
selling cost
P&G owned 80+ machines
in 1973, highest among all
major players

Cost Advantage to P&G

Assumptions
Each company will sell at the same price point
The output rate of Machine used by J&J will have the basic capacity as it is
installed only in 1973
Utilities and buildings cost the same for each company
Except for depreciation and utilities,all other costs are variable costs and are
fixed per unit
J&J has more complex machines that cost $1 million
The
no
of
years
for depreciation has been taken
same for each company
Kimberley Clark
J&J

P&G
Particulars
Raw Materials
Fluff Pulp
Cover sheet
Backing sheet
Packaging
Manufacturing Labour
Dep & Maintenance
Utilities
Total Manufacturing Costs
Freight
S&G,Admin Expenses
Pre tax profit
Selling Price (manufacturers)
Profit Margin
Yearly Production of diapers at 1
plant (4 machines)

Ouput rate of machines

Machine Cost
Building cost
Total Investment
Depreciation p.a.
Utilities
No of years to depreciate the
investment

Cost per diaper

Particulars

Cost per diaper

Particulars

Cost per diaper

0.006
0.005
0.001

Raw Materials
Fluff Pulp
Cover sheet
Backing sheet

0.006
0.005
0.001

Raw Materials
Fluff Pulp
Cover sheet
Backing sheet

0.006
0.005
0.001

0.003
0.003
0.001
0.001
0.020

Packaging
Manufacturing Labour
Dep & Maintenance
Utilities
Total Manufacturing Costs

0.003
0.003
0.001
0.001
0.021

Packaging
Manufacturing Labour
Dep & Maintenance
Utilities
Total Manufacturing Costs

0.003
0.003
0.006
0.003
0.027

Freight
S&G,Admin Expenses
Pre tax profit
Selling Price (manufacturers)
Profit Margin

0.004
0.006
0.009
0.040
22.87%

Freight
S&G,Admin Expenses
Pre tax profit
Selling Price (manufacturers)
Profit Margin

0.004
0.006
0.003
0.040
8.00%

Yearly Production of diapers at 1 plant (4

machines)

Ouput rate of machines

441133056

250-275/min

Yearly Production of diapers at 1 plant (4

machines)

Ouput rate of machines

209664000

100-150/min

Machine Cost
Building cost
Total Investment
Depreciation p.a.
Utilities

1200000
1800000
3000000
628992
628992

Machine Cost
Building cost
Total Investment
Depreciation p.a.
Utilities

4000000
1800000
5800000
1216051.2
628992

No of years to depreciate the investment

4.77

No of years to depreciate the investment

4.77

0.004
0.006
0.010
0.040
25.00%
628992000

350-400/min
1200000
1800000
3000000
628992
628992
4.77

Entry Strategy of Union Carbide

Should it even enter or
not?
Union Carbide
Sale price of 100 diapers
Cost of materials excluding
packaging

6
1.8

Labour cost

0.45

Dep.rate

0.15

Transportation

0.72

SG&A

1.5

Packaging

0.45

Utilities

0.15

Net

0.78

Profit%

Better quality, better

price strategy
13% profit margin is a
reasonable level of
profitability. So
logically it should
enter the market.

13

Assumptions
Selling price of Union Carbide diaper will be same as of Pampers(Exhibit A1)
Cost of materials is 30%
Labour cost % is same as P&G
Dep. Rate % will be same as P&G
Transportation cost will be slightly more than P&G because of less
distribution network
SG&A costs will be significantly higher than P&G as they are relatively new
Utilities is same as P&G

Concentrate on specific
region like New England
with a plant. Establish
their base first and then
enter other regional
markets
Aggressive marketing to
capture market share
Strategies for Entering