Porters Five Force Model
Hair Care Segment Domain: Shampoos
Threat
of substitutes - A substitute performs the same or a similar function as an industrys
product by a different means. y
Substitutes
Available: The total market for shampoos in India is estimated to be 2500-
3500 crores. HUL is the leader with 44% market share through its various brands and P&G comes second with a market share of 25%. Other companies including Dabur, ITC and CavinKare also are growing in this industry. This shows that there are a large number of substitute products available. y
Cost
of switching: The cost of switching brands is low. When a customer makes a switch
from P&G shampoo brands to other brands of shampoo, he might have to shell out the same price or lower price to procure shampoo. Hence the cost of switching is low. Hence, we can say that the threat of substitutes is High. Rivalry among existing competitors: Rivalry among existing competitors takes many forms
including price discounts, new product innovations, and adverstisements and service improvements. High rivalry in the industry limits the profitability of the same. y
Number
of competitors: There is huge competition amongst the existing players. HUL
and P&G are the major players in the shampoo category while other players like Dabur, ITC, LOreal, and CavinKare are also growing with their brands signaling intense rivalry in the industry. y
Industry
Growth: The shampoo industry grew by 16% over the fiscal year 2008-09
showing robust growth.
y
Exit
Barriers:
Companies like P&G need to invest high amounts in R&D, facilities,
distribution networks. Hence exit barriers would be high.
y
Difference In
products and brands: Companies spend a lot on product development and
brand building. Major competitors have their own brand following, leading to intense brand rivalry. y
Lack
of familiarity with competitors: HUL and P&G are almost at each others necks in
this industry. A recent teaser campaign of P&G was snapped by HUL when they killed the curiosity over P&Gs teaser campaign with one of their own. Competitors are very familiar with each other in this regard. Each one of them aspires to be the market leader in this space. From the above, we can say that there is intense rivalry among existing competitors.
Threat
of New entrants- The threat of entry in an industry depends on the height of entry
barriers that are present and on the reaction entrants can expect from incumbents. Some of the major sources which act as a barrier for new entrants include: y
Economies
of scale: Companies like P&G enjoy the benefits of large economies of size,
scale and diversity of products. As of now, P&G services almost 650,000 stores in India which gives an indication of the scale of production of P&G in India.
y
Industry Experience:
P&G launched its shampoos in India for the first time in 1995. Over
the years, it has built a skillful distribution system, has built strong brands, and has developed products and forms suited for Indian people. In other words, they have a wealth of experience in dealing with the shampoo market in India. y
Patents: P&Gs products are protected by patents.
y
Brand Identities: P&G has brought in successful brands from abroad and have honed
them according to Indian needs and as a result, developed strong brands. These strong brands act as barriers for new entrants.
y
Capital
Requirement: For an FMCG product like shampoos, large amount of capital is
required for product development, brand building, advertisements. Other activities like having a robust distribution system, giving credit to retailers, building inventories, having efficient communication systems all involve significant capital requirements which act as barriers for new entrants.
y
Unequal
access to distribution channels: P&G has a tremendous distribution network
connecting it to all Kirana Stores. Also, because of the strength of its brands, it has great preference even among the modern retailers. More limited the wholesale or retail channels are and more that existing competitors have tied them up, tougher the entry to the industry. y
Retaliation by incumbents: The shampoo industry is highly competitive and any entry of
new players would be followed by retaliatory actions by existing companies like HUL, P&G, and ITC which have deep pockets.
y
Regulations: Planning and establishing manufacturing facilities involves permits and adhering to environmental and government regulations.
y
inputs and resources: Though access to manpower could be easy, establishing partnerships with suppliers and distributors would be a challenge considering that they would be having well-established relations with the incumbents. Necessary
Thus, entry barriers for new entrants are high. Bargaining power Buyers - The main Buyers of P&G shampoo range include Retailers,
Wholesalers, drug stores and Modern Traders. Studies reveal that retailers need to fill their shelves, thus succumbing to the power of FMCG firms. This is precisely why retailer are left with little or no choice left but to accept the terms and conditions laid by the FMCG companies. y
On an average, P & G pays organized retailers 15-17 per cent in terms of margins on most product categories, barring food, which is a high-footfall-segment and must-carry for most retailers. Traditional trade, incidentally, which remains the key driver of sales for most FMCG firms, takes away the margin of 10-15 per cent.
y
There is sparring over issues like margins, credit periods, and timely deliveries with retailers. It is identified that bargaining power lies with FMCG companies. These retailers depend on P&G and other such companies for filling shelf space and footfall so negotiating power clearly rests with the company.
y
Switching
cost of Buyer - There is little cost associated in switching suppliers. The
retailers infrastructure remains unchanged including the storage space, means of transportation and other facilities. Also the distributors sales force remains unchanged with little alterations here and there. Thus, they can easily switch to other suppliers and keep shampoos of other FMCG which may give higher ROI, flexible delivery and high credit periods which are in favor of the buyer. y
Buyers Know How-The buyers do not need much technical information regarding
P&Gs shampoo range before buying the product. The brand name of P&G and premium quality associated with it ensures that buyers buy its products.
y
Modern
Trade-
MTs are responsive of cutting or holding prices of shampoos than
traditional retailers, with their bargaining powers of supplier and their private labels. Bharatiya Udyog Vyapar Mandal (BUVM), the biggest national-level association of momand-pop stores, has formed city-centric associations that negotiate directly with manufacturers such as Unilever and P&G and do away with any middlemen. thereby giving bargaining power in their hands.
y
Buyers Vertical Integration in the Business - Buyers can enter the shampoo market with
private labels posing a threat to P&G as they will market and position their products more aggressively than other brands. Thus, there is low Bargaining power of Buyers.
Bargaining power of supplier of suppliers Procter &Gamble supply chain managers had created a consumerdriven supply network in an effort to produce a low-cost yet robust supply chain from raw materials to delivery of final product. Today P&G has global computerized sourcing, where supplier can electronically submit offers to P&G buyer providing v aried options for suppliers. Consolidation
Importance
of P&Gs Business to suppliers- Since Procter and Gamble has 23.4 % market share
in shampoo industries, suppliers find beneficial to business with the Procter and Gamble due to high profitability and huge continuous business coming to them. Quality of Input is importune to P&G- Procter and Gamble indulge in innovative and creative
way of producing products hence quality is of prime concern in each step of production by suppliers. and Unique Inputs- P&G has innovative products- Head Shoulder, Pantene and Rejoice; which caters to varied market, each market has its own unique preferences and needs; one-size-fits-all approach will not work when supplying in global markets. Therefore, supplies services are differentiated with more than one supplier for the raw material. Specialized
Vertical Integration of Suppliers into Business- P&G spends huge amount in Research and
Development. There are many different components and ingredients, from raw materials (cultivation of plants and flora used in fragrances), through the final production stages and packaging and distribution. It would not be easy for suppliers to vertically integrate forward. Thus P&G provides Win-Win situation for its suppliers, with dominance in its hand, thereby providing Low bargaining power to Suppliers.
