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In the following chapter, the researcher provides the reader with the most relevant background information in order to understand the nature of this research. Firstly, a brief overview about consumer behaviour and its linkage to marketing is given. Secondly, the case company and the consumer goods industry are introduced. Thirdly, the establishment of the research topic as well as the aims and objectives of this research paper is outlined. Finally, the author provides the reader with an overall structure of the complete research paper.
The business area of strategic decision making in marketing and its interrelation to the achievement of consumer satisfaction has become increasingly important over the last few decades turning marketing activities into a critical success factor. Therefore, consumer buying behaviour around the world becomes very essential for companies in order to increase profitability. Consumer behaviour can be defined as “individuals or groups acquiring, using, and disposing of products, services, ideas, or experiences.” (Arnould et al, 2004, p.9) The researcher wants to investigate the linkage between consumer behaviour and a company’s marketing strategy with particular consideration of the pricing component. It is vital for a company to understand each of the above named stages in a consumption circle in order to achieve the best marketing opportunities.
Emotional benefits in marketing have received more and more attention and discussion because they work beyond the awareness of the customer and influence their buying behaviour. The New York Times states that, “over the last fifty years the economic base has shifted from production to consumption. It has gravitated from the sphere of rationality to the realm of desire: from the objective to the subjective; to the realm of psychology.” (Muschamp, 1999) Amongst others, Arnould et al (2004, p.20) state that “business stay in business not by producing products, building accounting systems, generating dividends for their owners, or managing employees”. Basically, companies continue their business by focusing, attracting and keeping customers, which they achieve through the exchange of resources like information, goods, emotions and money with their customers. This way, both parties receive benefits.
According to Procter & Gamble’s website (2007) “three billion times a day P&G brands touch lives of people around the world”. Bearing this in mind, the research topic was of particular importance to the researcher, because Procter & Gamble remains a constant key player in the consumer goods industry and apart from most of its rivals, is following a ‘value pricing strategy’, which is in today’s competitive environment very seldom. The toilet paper brand ‘Charmin’ and its role on the disposable paper market will be taken as an example for investigation.
Nevertheless, to attract and retain consumers becomes a more and more challenging task as “the world grows smaller and the global reach of businesses expands”. Therefore, companies have to emphasise more on the actual understanding of its consumers, their feelings, believes, thoughts and actions. Global businesses are even more challenged as they have to understand the global context. Even though, on a global scale, “consumers share many patterns of consumption, including brand and service loyalties,… making choices and purchasing products”, the company has to be aware of cultural diversity. (Arnould et al, 2004, p.20)
The focus of this study will be drawn on the disposable paper sector. Due to the fact, that Procter & Gamble (P&G) maintains dominance and a leading role in the toilet paper market, the company will be taken as an example to illustrate changes in consumer behaviour and marketing challenges which have to be faced. After profiling the company itself, the industry it operates in, will be introduced.
Procter & Gamble, a global manufacturer of consumer goods, was founded in 1837 and is based in Cincinnati, Ohio. With 110,000 employees in over 80 countries, the company accounts annual revenues of US $ 56.741 billion. The company’s main purpose is to “provide branded products and services of superior quality and value that improve the lives of the world’s consumers” which will result in expected headship sales, revenue and value creation. (Procter & Gamble, Who we are, 2007) The company is today one of the oldest but most successful global players, steadily innovating new consumer products. (Morrison, 2002, p.15)
The history of the company leads back to the cooperation of the candle maker William Procter and the soap maker James Gamble who invented Procter & Gamble as business partners. Soon the business began to fluctuate and reached the US $ 1million sales mark. In the mid 1880s the company profited from contracts made with the US Army to supply the army with soap and candles. After this deal, the company steadily introduced new high quality products and established a revolutionary profit sharing programme for its workforce in 1987. By 1920, the company decided to end production of candles and concentrating on soap as, due peoples’ upcoming electricity usage, candle production was not profitable anymore. (Procter & Gamble – Our History, 2007)
Procter & Gamble was expanding soon with production facilities over the United States and had a well reputation for its research and development activities and their invention of new products. Furthermore, the company’s management broke new grounds in market research about consumer behaviour concerning needs and wants of consumers and product appeal. During the 1930s, the company moved across national boundaries in both, production and sales, and started acquiring international companies, starting with Thomas Hedley Co. in Newcastle upon Tyne. In these years it also became famous for its involvement in radio sponsorship as new marketing technique, which resulted in the well know ‘soap operas’. Throughout the 1950s and 1960s, Procter & Gamble started to expand its product areas, by introducing the laundry detergent ‘Tide’, the ‘Prell’ shampoo series, ‘Crest’ toothpaste and obtained ‘Charmin Paper Mills’ which set the beginning of the company’s toilet paper production. After focusing on laundry products, the company landed a huge success in 1961with the introduction of the first disposable diaper ‘Pampers’. In the upcoming years, in order to further develop and diversify its product line, Procter & Gamble acquired among others, companies like Folgers Coffee, Old Spice, Max Factor, Iams, and Norwich Eaton Pharmaceuticals.
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In the 1990s the company was still growing in profits but it soon faced challenges caused by its static management, which was build on bureaucratic hierarchy. Another threat to the company was upcoming new brands from supermarket chains and other copycat products, which reduced P&G’s sales tremendously. Wal-Mart, as one of P&G’s strongest competitors, grew more influential and powerful and was able to demand lower manufacturing prices and therefore able to offer products at lower prices. The company soon restructured its management into a less multilayered bureaucracy and concentrated more on product innovation. (Morrison, 2002, p.15) Then in January 2005, the company merged with Gillette, which allowed Procter & Gamble to replaced Unilever’s position as the largest company in the consumer goods industry. Through this merger, five more billion dollar brands, such as Duracell, Gillette, Braun and Oral-B, were added to the company’s product portfolio, which is illustrated below. (Procter & Gamble, Our History, 2007)
Figure 1: Illustration of Procter & Gamble brands
(Source: Procter & Gamble, Products, 2007)
The company operates its products in five different business units: washing and cleaning, hygiene and paper, cosmetics and perfumes, healthcare and pharmaceuticals, and others, including food and drink. The following tables (Table 1 & Table 2) outline the company’s sales by division and its net profits by division from 2001 – 2005.
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Table 1: Procter & Gamble – Sales by division
(Source: Euromonitor International, Procter & Gamble, Co., 2006)
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Table 2: Procter & Gamble – Net profit by division
(Source: Euromonitor International, Procter & Gamble, Co., 2006)
A more detailed list of the company’s global products can be found in Appendix 1. The business customers of Procter & Gamble’s over 300 branded products are mostly grocery stores, drug stores and merchandisers. (Procter & Gamble, Products, 2007)
In 1960, the company first started operations in Germany with the Procter & Gamble GmbH based close to Frankfurt and employing 7.500 people. Its competitive positioning is difficult to analyse as it operates in five different industries. In order to enlarge its product portfolio and to reinforce its position, the company acquired many conventional German firms and brands like Blendax, a toothpaste manufacturer, Betrix, a cosmetics manufacturer, Tempo tissues and the Wella AG, a leading hair care company. (Euromonitor International, Disposable Paper Products in Germany, 2006)
In the household care industry, the company has a leading position in washing detergents with products like Mr. Proper, Lenor, Dash and Ariel. In laundry detergents, the company is positioned second with value sales of 16%. Appendix 2.1 illustrates Procter & Gambles share in each subsector of the household care market. (Euromonitor International, Household Care in Germany, 2006)
Concerning the cosmetics and toiletries market it is ranked fourth with an 8% share of sales in the industry in 2005. Appendix 2.2 shows the company’s shares in each subsector by its retail value. (Euromonitor International, Cosmetics and Toiletries in Germany, 2006)
In the disposable paper market, Procter & Gamble is the market leader with value sales of 18% in 2004, as the company is strongly represented all subsectors (see Appendix 2.3). Its success can be lead back to a successful pricing with Pampers and the introduction of the quality toilet paper ‘Charmin’, which outperformed soon its competitors on the market. (Euromonitor International, Disposable Paper Products in Germany, 2006)
According to the ‘Charmin’ homepage (2007), the toilet paper was first manufactured in 1928 by the Wisconsin based Hoberg Paper Company and the brand name was born though the design, described by an employee as ‘charming’. Back then designed to appeal to women with a light blue packaging and the silhouette of a woman. In 1953 a new baby image (the ‘Charmin Baby’) on the packaging was introduced to symbolise gentleness, softness and quality of ‘Charmin’. Four years later, the company was acquired by Procter & Gamble, who patented in 1973 a new manufacturing method in order to make the paper softer with the same strength. During the 1980s and 1990s, the company continuously introduced new Charmin product lines; Charmin Free (1986, free of inks, perfumes and dyes), Charmin Ultra (1993, upgraded product), Charmin Plus (1993, with aloe vera and lotion). Among other innovations, a triple roll was introduced in 1997 with triple sheets but still fitting to a standard roll holder.
In 2000, P & G decided to launch a new advertising campaign, introducing a cartoon bear, who is experiencing Charmin’s comfortable softness. The company improves the product until today and launches regularly new extensions of the product line.
The disposable paper industry is highly dynamic with total value sales in retail disposable paper products up to US$ 87 billion in 2004 (see Appendix 3). However, it can be analysed that there exists a high concentration of value shares among the two major manufacturers; Procter & Gamble and Kimberly Clark (see Appendix 4). Yet, they had to suffer a loss in value shares in 2004 due to the increasing success of private label products, which profited form the global expansion of main retailers.
According to the Euromonitor (The World of Disposable Paper Products, 2005), it can be said, that world wide markets are experiencing some major challenges, like a deep penetration of households and strong price competition from private label products. In return, manufacturers reacted to this unfavourable impact by increasing research and development activities in order to add more value to their products.
Despite the intense challenges, the industry is experiencing increasing demand for premium products that facilitate everyday life, as consumer lifestyles are accelerate not only in developed markets but also in emerging markets like Latin America, Eastern Europe, Asia-Pacific and Africa, where economic conditions seem to recover. Furthermore, sales of disposable paper products in the mentioned regions are increasing due to improvements in distribution systems through supermarket channels.
As a forecast, it can be argued that markets like the US and Western Europe might suffer from stagnation due to the mentioned price competition between manufacturers and retailers and the rising success of private label brands. Furthermore, sectors such as diapers might experience a decrease in value sales because of the shrinking birth rate. On the other hand, manufacturers are constantly aiming for innovation which might boost sales in the future due to the rising ‘willingness’ of customers to spend more money for more valuable products due to higher convenience and hygiene requirements.
Global players are particularly looking for generating growth in emerging markets by introducing highly innovative products into peoples’ everyday life and “raising consumers awareness through aggressive marketing” in order to expand beyond their core markets. (Euromonitor International, The World of Disposable Paper Products, 2005)
Speaking of the consumer goods industry in this project, it will be focused on the Western world, where consumption is more of an ideology. Due to the scope of study, the author will put limitations and take the German market into consideration, which to some extent has a certain level of generalisablity for the Western society. The author will concentrate on latest trends and future tendencies of the industry by relating it to the current marketing issues.
The researcher chose Procter & Gamble as an example case, in order to outline the extent to which consumers are influenced by marketing activities, with a specific reference to pricing differences.
According to the mentioned dynamic of the disposable paper business and the importance of strategic decision making in marketing, the following hypothesis was made up:
Private label brands are a threat for high value manufacturer’s brands such as “Charmin”!
An investigation of Procter & Gamble’s marketing strategy focusing on ‘pricing’, under critical consideration of consumer buying behaviour and brand loyalty.
To underline the research topic, the researcher set up the following objectives:
- To critically analyse strategic marketing changes and the dynamics of the disposable paper industry
- To identify consumer buying behaviour in Germany concerning marketing strategies in the disposable paper sector
- To draw conclusions about the success or failure of P & G’s marketing strategy in the disposable paper sector
It is crucial in today’s market economy to rather concentrate on the consumer, not the product itself. As there is a general lack of publications on the topic regarding marketing activities with emotional benefits, it will be examined whether or not Procter & Gamble can sustain successful in today’s competitive market. Consumers tend to be more conscious about pricing in general, which gives the research a critical perspective as Procter & Gamble is following a constant ‘value pricing strategy’.
The introductory chapter outlines the basic knowledge of consumer behaviour and its nature. After an overview of the case company Procter & Gamble and its operations in Germany, the researcher focuses on the disposable industry and the brand ‘Charmin’.
In the second part, the researcher provides the reader with a general idea of the key theoretical perspectives influencing this study by providing an extensive literature review. The strategic dimension of this chapter focuses on strategies of competitive advantage, stakeholder theory, strategic decision making and how value can be added to an organisation. Secondly, the operational dimension, discussing marketing theories, will help the reader to have a general understanding of the basic principles of marketing and its tools such as branding and pricing. After discussing branding in-depth considering the influence of private label brands and branding strategy on an emotional level, high emphasis will also be put on the pricing and value pricing strategies as this reveals to the research topic in question. Thirdly, consumer buyer behaviour and including segmentation methods, consumer perceived value as well as brand loyalty will be discussed.
Chapter three provides a detailed explanation and justification of research philosophy, approach and strategies used by the author. It describes the data collection methods utilised, explains the nature of the credibility of the findings and concludes with the ethical issues to be considered in order to achieve the aims and objectives of this project.
In chapter four, the author analyses the research findings according to their relevance to each research objectives. The collection of primary data is firstly presented and then discussed with a respect to the second objective.
In chapter five the researcher concludes the project and gives a critical reflection of the research topic. After testing the hypothesis, recommendations will be given to the company. Areas of further research, the success of the project as well as restrictions and limitations will be outlined. Finally, the researcher gives a personal reflection of the research project.
In summary, the data used in the introduction, provides the foundation of discussion for this dissertation and provides the reader with a broad understanding of the following research.
In chapter two, the relevant literature will be critically reviewed in order to highlight and underpin the significance of this research.
According to Denscombe (2003, p. 293), a literature review is “a review of material that already exists on the topic in question. It should demonstrate how the research being reported relates to previous research and, if possible, how it gives rise to particular issues, problems and ideas that the current research addresses.”
In order to analyse the research topic, it is important to firstly outline a strategic overview in order to provide the reader a more holistic view of the subject area. Strategic management and especially theories of sustained competitive advantage became of particular importance during the last decades and are outlined in order to explain the strategic dimension of this research project. The second part of the literature review, provides the reader with an up-to-date account to understand the relevant principles of marketing in an operational dimension and a precise focus on pricing and branding. Finally, consumer buying behaviour with a respect to consumer perception and brand loyalty will be discussed.
Due to the limited scope of this work, the author cannot go further in detail but presents a brief overview of the relevant theory and the areas particular interesting to the study. Nevertheless, the chosen literature will put the research topic in a conceptual and theoretical context which helps the reader to gain a more holistic view of the subject area.
The dimensions of strategy are, according to De Wit and Meyer (2004, p.5), the strategy process, the content and the context, which interacts and leads to an overall strategic understanding. Indeed, it is crucial when talking about strategy, to draw on terms such as “competition, competitive strategy, competitive benchmarking, competitive advantages and outperforming the competition” (Kim and Mauborgne, 1999, p. 41) However, many companies rather imitate than innovate as they are just striving to improve competitor’s outcomes in order to gain competitive advantage. Therefore, Kim and Mauborgne (1999, p.42) suggest value innovation as a strategy for sustained high growth and profits because it “makes the competition irrelevant by offering fundamentally new and superior buyer value in existing markets and by enabling a quantum leap in buyer value to create new markets.” Thus, innovation is not meant in the conventional context of technology but rather in a sense of value. Even though there exists no universal definition of strategy, Hax (1990, p. 110) stresses out to proceed the conception of strategy as “a course of action for achieving an organization’s purpose”. Thus, this course of action can be taken as an integrated process which involves a strategic thought, a formed strategy or a strategic change. In order to be successful in the short term, as well as in the long term, and to reach the organisational objectives, strategic processes need to be structured, organised and nurtured (De Wit and Meyer, 2004, p.51). According to Lynch (2006, p.5), “corporate strategy is concerned with an organisation’s basic direction for the future: its purpose, its ambitions, its resources and how it interacts with the world in which it operates”.
Porter (1985, cited by De Witt and Meyer, 2004, p.258) states that “competition is the core of success or failure of firms”. Therefore, a company must search for its most favourable position in order to sustain competitive advantage in their industry by considering the factors ‘where to compete’ and ‘how to compete’. Porter assumes that the factors determining industry competitiveness and attractiveness are driven by rather external than internal factors.[i]
Porter (1980) conducted a theory of five competitive forces (Figure 2) which emphasises all elements that may drive competition in an industry. This model explains the attributes on how to gain competitive advantage in an attractive industry and thus states that opportunities will be higher and threats lower. Porter (1980) advises the analysis of the company’s opportunities and threats in its competitive environment, followed by the decision of the most appropriate strategies and the acquisition of the sources required to put the strategies into practice. This leads to the assumption that company’s operating within one industry possess identical resources and therefore are able to apply these strategies. (Porter 1980, cited by Barney, 1991, p.102)
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However, most strategic theorists concentrated on analysing sustained competitive advantage on either a firm’s external or internal environment.
In contrast to Porter (1980), Barney (1991, p. 99) recommends that companies gain competitive advantage by exploiting their “internal strength, through responding to environmental opportunities, while neutralizing external threats and avoiding internal weaknesses” (see Figure 3).
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Figure 3: SWOT Analysis
(Source: Lynch, 2006, p.450)
Barney (1991, p. 102) identified three key concepts, which build up sources of sustained competitive advantage; firm resources, competitive advantage and sustained competitive advantage. Firm resources incorporate all assets (physical capital, human capital and organisational capital) controlled by a firm and comprise the strength which they can utilise to implement their strategy. Even though, some of those attributes may not necessarily be suitable, others might “prevent a firm from conceiving of and implementing valuable strategies”, which again others “may lead a firm to conceive of and implement strategies that reduce its effectiveness and efficiency”. (Barney, 1986, cited by Barney, 1991, p.102) Competitive advantage is gained by a company when it is putting into practice a strategy which is not concurrently being implemented by any other competitor, whereas sustained competitive advantage means that the competitors additionally are not able to duplicate or imitate the benefits of the theory.[ii] However, Panzar and Willig (1982, cited by Barney, 1991, p.101) argue that competitive advantage is not only applied to the present market position in the industry but needs to be further analysed concerning future potential competitors. (Barney, 1991, p. 101)
Kotler and Keller (2006, p.150), in addition, look at competitive advantage from a customer’s perspective as state that “any competitive advantage must be seen by customers as a customer advantage” by focussing on customer needs and perceived values, which in return deliver customer advantage, leading to repeated purchases and higher profitability for the company
Competitive advantage is gained by a company when it is putting into practice a strategy which is not concurrently being implemented by any other competitor, whereas sustained competitive advantage means that the competitors additionally are not able to duplicate or imitate the benefits of the theory. In order to clarify the definition of sustained competitive advantage, it has to be said that it does not depend on the exact time, a company benefits from a competitive advantage over others but rather on the fact that competitors are not able to make duplication efforts. (Lippman and Rumelt, 1982, cited by Barney, 1991, p.101)
Procter & Gamble achieved sustaining competitive advantage, through its core competency by applying its greater consumer insights into its brand selection. Therefore, potential or actual competitors are not able to establish the same value.
When building up organisational strategies, it is crucial to understand the responsibility towards a firm’s internal and external stakeholders, because each of these different groups has other expectations in the organisations’ performance. (Polonsky, 1995, p.29) Freeman and Reed (1982, p.58) argue that it has long be the gospel that “corporate action or inaction is to be driven by attention to the needs for its stockholders, usually thought to be measured by stock price, earnings per share, or some other financial measure.” However, the views on corporate life changed and the stakeholder notion was developed. Freeman and Reed (1982, p.59) states, that the corporation is not only responsible to the shareholder, but also to everyone how has a stake in the corporation, which include shareowners, customers, suppliers, lenders, society and employees. Management theorists therefore suggest that considerations about all the stakeholders groups are necessary for an organisation to develop an appropriate strategy. (Polonsky, 1995, p.29)
Furthermore, it can be argued that stakeholder theory also plays an important role in developing a company’s marketing strategy. Polonsky (1995, p.30) stresses that stakeholder theory became a core element of marketing theory, as the organisation attempts to plan one scheme that satisfies both, the firm and the consumers. Therefore, the stakeholder approach is used whenever a strategy is adapted in order to “accomplish an organization’s objectives by anticipating customer or client needs and directing a flow of need, satisfying goods and services form producer to consumer” (McCarthy and Perreault, 1993 ,p. 349)
It is necessary for an organisation like Procter & Gamble to identify its main stakeholder group in order to sustain competitive advantage in the industry. As customers can be identified as key stakeholders, a high emphasis should be put in customer demand, satisfaction and contentment. Therefore, stakeholder theories affect the topic of consumer buying behaviour.
Furthermore, literature about strategic decision making and adding value was analysed in order to justify the company’s worldwide applied ‘value pricing strategy’, which is based on this strategic activity. Companies in general aim to add value on their external supplies in order to guarantee enduring competitive advantage. Corporate strategy, and more specifically strategic decision making, facilitates the ability to establish additional value and to keep the company vital. (Lynch, 2006, p.8)
Simon (1960, p.1) sees decision making from a management perspective as a process, saying that “decision making comprises three principal phases: finding occasions for making a decision; finding possible courses of action; and choosing among courses of action.” [iii] Organisations like P&G rely particular on these sustainable strategic decisions which help to maintain competitive in the marketplace. According to Lynch (2006, p.9), another key element of strategic decision making provides the organisation the ability to develop towards their strategic goal or purpose. Another element is the exploitation of connections between the firm and its environment which again are difficult for rivals to duplicate or imitate. In a highly competitive market like the consumer goods market, a clear future vision enables the company to “move the organisation forward in a significant way beyond the current environment” (Lynch, 2006, p.9).
Following the decision of value innovation, management has to communicate this decision throughout the entire company as a key strategy factor with the overall goal to change the company’s previous strategic direction. Kim and Mauborgne (1999, p. 47) argue that the key strategic agenda for giant corporations is value innovation in today’s knowledge economy. They state for example that “Procter & Gamble’s strategic goal for the next decade is to double its business through assertive efforts to achieve business breakthroughs.”
Even though P & G is a giant company, operating globally, they try to communicate the feeling of capacity to act and autonomy among its employees. The company’s idea of innovation is to imply a top down approach concerning employee empowerment and independence. Small teams with a size of three to five people have the ability to be creative and find grounds for value innovation.
The former Mc Kinsey consultant and co-author of the ‘Competing on the edge’, Shona Brown (2003, cited by Heuer, 2007, p. 28) suggests, that a certain level of chaos is essential for an organisation in order to keep its creativity. However, it is important to neither tend to the extreme of complete establishment of order nor, the absolute chaos. A multinational company can only be creative in the long run, create new markets and be competitive in its industry, when it finds the right balance between disorganisation and planning. Brown (2003, cited by Heuer, 2007, p. 29) calls this approach a ‘half-coherent strategy’ in order to be prepared for change which is not predictable by managers. The strategy to act competitive on the edge is to create a constant progression in competitive advantage, resulting in a semi-finished strategic direction. Thus Brown (2003, cited by Heuer, 2007, p. 30) suggests considering five necessary building blocks; improvisation, adaptability, ability for regeneration, eagerness to experiment and good sense of time.
Nevertheless, a lot of organisations have a very successful performance by following a “competition-driven strategy”, without considering value innovation as a key strategy.
[i] Thus, distinctive firm characteristics on the company’s competitive position are not highly stressed out as Porter (1980, cited by Barney, 1991, p.99) emphasises the obtaining of sustained competitive advantages through reacting to the external opportunities by the given internal strengths.
[ii] In order to clarify the definition of sustained competitive advantage, it has to be said that it does not depend on the exact time, a company benefits from a competitive advantage over others but rather on the fact that competitors are not able to make duplication efforts.(Lippman and Rumelt (1982, cited by Barney, 1991, p.101)
[iii] Harrison (1996, p.46) also notes that “a decision is defined as a moment, in an ongoing process of evaluating alternatives for meeting an objective, at which expectations about a particular course of action impel a decision maker to select that course of action most likely to result in attaining the objective”
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