RSM251 Case 1 Assignment Report PDF

Preview

Summary

Download RSM251 Case 1 Assignment Report PDF

Description

Colgate Palmolive Company: The Precision Toothbrush

Nikolina Granic 999648323 RSM251 – Marketing Management Luciano Volpe October 7, 2014

PHONE Error! Bookmark not defined.[Your Phone]

FAX Error! Bookmark not defined.[Your Fax]

WEB Error! Bookmark not defined.[Web Address]

Nikolina Granic Table Of Contents: Introduction Issue Statement Situational Analysis -

5 Competitive Forces that Shape Strategy

Alternatives/Option -

Pro Forma Income Statement

Decision Criteria Recommendation Action Plan Conclusion Appendix

2

Nikolina Granic

3

Introduction: The following report will include a thorough analysis of the Colgate –Palmolive Company and their prospective launch of the Precision Toothbrush. I will assess the new product development process and through various methods of analysis build an effective strategy for the positioning, branding and communication process for the new product. Currently the company is a successful leader in the oral care industry, maintaining strong figures in both their Value and Professional lines of toothbrushes. Their mission is to develop a new superior, technical, plaque-removing device that will enter the market competitively. Current competitors include Oral B, Reach by Johnson and Johnson, Crest by P&G and Aquafresh by Smithkline. Colgate anticipates on launching this product and entering into a newer more elite product category by reaching out to customers seeking to remove more plaque than the other brands and maintain gum health to prevent disease. The market was segmented into varying toothbrush users: therapeutic brushers, cosmetic brushers and uninvolved oral health consumers. With Colgate emphasizing new product launches and improved internal distribution efficiencies, since 1985 the company has been able to increase gross margins from 39% to 45% with annual volume growth share averaging 5%. Although an international player, attention will be brought to the US Oral Care Industry whereby toothbrushes account for 19% of Colgate’s sales and profits and they held the number one position in the toothbrush market specifically with 23.3% volume share. In the toothbrush industry in 1991, dollar growth exceeded volume growth because of the emergence of a “super premium” sub category of toothbrushes; this difference was offset by downward pressure on average retail prices in mass merchandiser channels and growth of private label toothbrushes. Within this report I will hope to gather insights

Nikolina Granic

4

on Colgate’s position and the likelihood of success if launching their new product in this surfacing sub category of brushes. Fundamental Issues: The Colgate-Palmolive Company intends to launch a new product and enter into a segment they are currently not operating in. How the Precision toothbrush will be positioned, branded and communicated to consumers to convey its technological breakthrough in an already saturated marketplace with the company’s current promotional budget is the challenge I will address throughout my analysis. The Precision toothbrush is advancement from current offerings that must be projected in a way for the company to maintain its brand equity and growth position in the industry. Situational Analysis: To gather insights on the Precision toothbrush it will be useful to analyze the company using various strategic methods. Using the 5 Force Analysis Tool, Marketing Mix 4 P’s and Pro Forma Income Statement I will be able to further advise on the steps the Company should take in regards to the Precision toothbrush. In Exhibit 1, The 5 Competitive Forces that Shape Strategy are presented and critically used to give awareness to the structure of the American toothbrush industry and stake out a position that is more profitable and less vulnerable to attack. Using this model allows Colgate to analyze their competitive threats and become aware of possible courses of action for the Precision toothbrush. Defining the industry as the American Toothbrush Market in 1992 gives scope to the threats the company was facing directly at the time prior to the new product launch. At that time the threat of new entrants was moderate since Crest had just launched their new brush Crest Complete and the Smithkline Company already had entered. The threat predominantly derived from the Super Premium product category release of the Crest Complete brush; it was an unfamiliar market to Colgate whereby they could be threatened by the well-known brand

Nikolina Granic

5

extension of Crest. The Smithkline Company does not seem to be doing so well which would allow Colgate to strictly focus on Crest as a threatening entrant into their product category. There are definitely high threats associated with substitute products. Colgate faces competition from toothbrush brands: Oral B, Reach, Crest and Aquafresh. Each brand offers various types of brushes and markets to the same segments therefore many alternatives are available in place of the Precision toothbrush. In 1992 new products were focused on technical performance improvements rather than cosmetics giving rise to the challenge of differentiating your toothbrush features and benefits to enter the super premium segment of toothbrushes and remain a strong position. The super premium segment, which is a potential new market segment for Colgate, has an extremely high threat of substitute products, which could limit the intended growth of the product. The bargaining power of buyers is analyzed from viewpoint of the consumer and retailer, observing their associated power over our product. In this particular industry of Oral Care many consumers chose brands on the base of features, comfort and professional recommendations whereby their decision was influenced by the brands advertising. Interestingly enough, 82% of consumer purchase of toothbrushes was unplanned and prices were unfamiliar to them. This gave Colgate the opportunity to adjust their prices to actively compete in the super premium segment without having consumers question such prices in place. Consumers were willing to pay premium prices for products that addressed the issue of gum health than cavity protection, not giving much bargaining power to consumers. Coincidently this is how Colgate would market their Precision toothbrush, as preventing gum disease and bringing light to this oral care issue. I would further conclude that the bargaining power of buyers is moderate at best as Colgate chooses to focus their products where retailers and trades provide them with competitive shelf space offerings, maintain 25-40% of shelf space between their top competitors Oral B and Reach. Since retailers were more receptive to adding brushes versus toothpaste because they provided higher margins which further benefits Colgate. In addition, since trade buyers choose

Nikolina Granic

6

brands based on advertising and promotional support I would say that the bargaining power of buyers here depends on the companies efforts to grasp trade buyers attention and maintain reputable track records with their products. The bargaining power of suppliers is quite low in the toothbrush industry due to the fact that toothbrushes are commodities produced from commodities like plastic, which are essentially, priced equally. This gives Colgate the privilege of low switching costs and to attain the best offer possible with the many options available. Colgate should not focus their energy on the bargaining power of suppliers, as it is not a major issue for the company right now. Rivalry amongst existing competitors was high and strong. The market was saturated with huge competitors and private label toothbrush companies. The main rivals of Colgate in 1992 as mentioned previously are Crest, Reach, Aquafresh and Oral B. Some smaller competitors to consider include Lever, Pfizer and Sunstar. The top 4 competitors of Colgate all set to release a toothbrush in the super premium subcategory making rivalry extremely competitive and challenging. Due to the increased competition Colgate must keep up by gaining consumers via greater and more frequent promotion efforts such as coupons and in store promotions. Lever, a value brand did not have a strong track record of innovation allowing Colgate to focus on its professional and potentially new super premium segment. Johnson and Johnson Professional 45 degree brush was being phased out which was a valued competitor. Colgate will be most challenged by Oral B’s super premium brushes that rely heavily on professional endorsements. Oral B is known as the recommended brand by dentists, which gives them an advantage. These professional endorsements further translate into consumer brand preferences since consumers rely on recommendation from healthcare professionals. Valuable insights can be gathered from Exhibit 1 that can guide Colgate into the right direction with the launch of the Precision toothbrush. Through this analysis I was able to understand the growing competition in the super premium segment that Colgate will face with its new launch. It is also more obvious that consumers purchase decisions are heavily swayed by advertising and professional recommendations. It is also important to note the efforts that retailers go to

Nikolina Granic

7

expand shelf space of toothbrushes as it provides a high margin. Now how will Colgate effectively position, brand and communicate their message for the Precision toothbrush? Alternatives/Options: Using the strategic marketing tools in my analysis I will present 3 options the company can take in regards to the launch of the Precision toothbrush. It will be known as a superior, technical, plaque-removing device positioned amongst its top competitors. Positioning Options: 1). Could be positioned as a Niche Product to be targeted at consumers concerned about gum disease. 2). Could be positioned as a mainstream brush, with broader appeal of being most effective brush available 3). Initial niche positioning, later broadened to mainstream positioning when additional capacity available Branding Options: 1). “Colgate Precision” 2). “Precision by Colgate” Analysis of Positioning Options: Refer to Exhibit 2 and Exhibit 3 for the pro forma income statement for the years 1993-1994 based on releasing the product as a niche product versus a mainstream product. Since Colgate developed Precision with the objective of creating the most effective brush possible and becoming a top of the range super premium product. This is a category they have not yet tapped into at the time. Observing the prospective financials of releasing the product it is easily

Nikolina Granic

8

observed that the Niche product operating profits are a higher percentage than the mainstream products. The net sales figures were calculated by considering how toothbrushes were reaching customers. If positioned as a Niche product, Colgate would sell to retailers at $2.89/unit, to trade through promotion sampling at $2.02/unit and to dental professionals at $0.79/unit on the first 80% of sales and at $0.95/unit on remaining 20%. If positioned as a mainstream product, Colgate would sell to retailers at $2.49/unit, to trade through promotion sampling at $1.76 and to dental professionals at $0.79/unit on the first 80% of sales and at $0.95/unit on remaining 20%. It is important to consider the differing channels of distribution between the positioning options. As a niche product, Precision would be distributed by food and drug stores. As a mainstream product, a larger proportion of the sales would occur through mass merchandisers. In essence, as a niche product Colgate will be able to charge high competitive prices and earn higher margins with retailers over mass merchandisers. The per unit cost of Precision as a niche product versus a mainstream product is only a $0.02 difference implying the greater opportunity in operating profit growth with the niche product. A concern in the positioning of Colgate is the potential cannibalization of its current product lines. If positioned as mainstream it may cannibalize the Colgate Plus line that is already in this particular market segment leading for the company. By positioning as a niche product it will allow Colgate to expand its product line into the super premium segment without directly hurting the Professional line they currently carry. Analysis of Branding Options Regardless if Colgate chooses to position itself as a niche product or mainstream product, it must consider how the brand will be represented. Since the Precision toothbrush will enter the super premium market I feel it should be differentiated from the professional and value lines that Colgate offers. By stressing Precision over Colgate the company could limit the extent of cannibalization providing a new focus for the consumer with the release of the Precision toothbrush. Limiting cannibalization allows Colgate to further grow as a company and not risk their other successful

Nikolina Granic

9

product lines. The name “Precision by Colgate” allows the product to differentiate itself while still allowing the company to build on Colgate brand equity. Colgate can further establish its brand equity for their products by making them impressive, easily recognizable and superior in quality and reliability. By allowing Precision to be emphasized the company will not have to be as concerned with cannibalization but still allows the high quality superior toothbrush to successfully build Colgate’s brand equity. Decision Criteria The criteria that the alternatives are weighed against for the Colgate Company are: 1. Brand Equity and 2. Position/Growth 3. Cost (advertising/promotion budget) How can the Colgate Company overcome the related issues with the product launch whilst considering the importance of building their brand equity and maintaing their position as a US leader in the toothbrush market? The goals and objectives of the company must be considered with the introduction of the Precision toothbrush. Recommendation: Based on the insights gathered from the 5-force analysis, pro forma income statement and decision criteria the company considers My recommendation is to position Colgate as a niche product initially then broaden to mainstream as capacity becomes available. It should be branded as “Precision by Colgate”. The operating profits achieved and growth over the first two years if released as a Niche product will be able to help provide additional capacity and eventually distribute in more outlets as progressing to a mainstream product. Colgate could also consider this because it allows the Precision toothbrush to grow and strengthen itself in the marketplace whereby if Colgate has new technology

Nikolina Granic

10

advancements the Precision brush could at this point become a mainstream product to allow room for new product innovation. By emphasizing the name of the toothbrush and then the brand allows consumers to focus their attention On Precision rather than just Colgate which will dilute cannibalization of Colgate Plus and potentially allow the Colgate Brand name to receive more recognition from consumers for their superior quality toothbrush. The company also needed to monitor their promotional budget and ensure that by launching Precision to not exceed budget of $24.1 million. The Precision toothbrush should be communicated to consumers via sampling and trials to allow consumers to see for themselves how well the product works. This can be done in store or through professionals to receive greater credibility. Action Plan: By positioning Precision as a niche product by the name of “Precision by Colgate” whilst considering company objectives and promotional budget the company can achieve success in the short and long term. In the short term the product will start as a niche product where it will gain market share, consumer loyalty and create brand equity for Colgate brand. As the product gains strength and superiority in the marketplace the additional funds from investing in their product will be used to expand capacity and eventually distribute as a mainstream product. In the long term by broadening to mainstream it allows the already strong Precision by Colgate toothbrush to compete on lower prices and gain further market share for their product lines. The goal of marketing is to put the right product in the right place and the right price at the right time. Colgate will do just that by positioning the new technologically advanced toothbrush in higher margin retailers such as drug and food stores, at competitive prices at the time their main competitors also target the Super Premium market segment.

Conclusion

Nikolina Granic

11

I anticipate that Steinburg will take my analysis into consideration on how Precision should be positioned, branded and communicated to consumers. I have also outlined their current promotional budget to keep in consideration. The strategies mentioned will ensure positive relation to the Precision toothbrush and enhance the offerings of the Colgate brand. ‘

APPENDIX Exhibit 1: American Toothbrush Market in 1992 ENTRANTS -Procter & Gamble (SuperPremium) Crest complete was projected to be released around the same time (see pg. 38 for marketing efforts) -Smithkline Beecham (SuperPremium) expected to make an operating

SUBSTITUTES

-Many substitutes projected to exist at the time of Precision release

BUYERS

-Increased purchase frequency due to media support and coupon circulation Willing to pay premium for products that addressed the issue of gum health rather than cavity prevention -Purchase frequency lagged replacement frequency due to 2-for-1 offers -Purchases were unplanned and relatively unfamiliar with prices -70% of consumers were triggered to buy a new toothbrush at the notice of worn bristles -Brand preference largely influenced by features, comfort, and professional recommendation -Increase advertising captures buyers' attention -Toothbrush sales increased with retail advertising and in-store displays

SUPPLIERS -Brushes are manufactured from commodities which are priced equally (low switching costs)

RIVALRY -Lever (Value) Johnson & Johnson (Professional) Brush used for 45 degree brushing (recommended) was being phased out -Oral-B (SuperPremium) Relied heavily on professional endorsements -Increased competition resulted in greater and more frequent promotion efforts

Nikolina Granic loss in 1992

12 -CP maintained 25%-40% of shelve space in retail stores and were placed in between Reach and Oral-B -Less focused on grocery stores and more focused on mass merchandisers (increased in store promotion) -Retailers were more receptive to adding more variety of brushes than toothpastes due to the higher margins generated from sales -Trade buyers chose which brand to buy based on advertising and promo support (and track record in each category) -Increased shelf space in stores to accommodate the introduction of more products

Nikolina Granic

13

Exhibit 3:

PRO FORMA INCOME STATEMENT PROJECTIONS FOR 1993-1994 Precision as Mainstream Product 1993 Unit Sales ('000s) 42,000 Net Sales ($'000s) C

$85,628

1994 59,000

100%

$128,705

100%

T Exhibit 2: T PRO FORMA INCOME STATEMENT PROJECTIONS FOR 1993-1994 M Precision as Niche Product C 1993 T Unit Sales ('000s) 13,000 O Net Sales ($'000s) Cost of Sales

$29,626 8,580

1994 20,000

100% 29%

$49,856 $13,200

100% 26.50%

Total Fixed Overhead

3,250

11%

1,300

2.60%

Total Advertising Media Consumer Promotions Trade Promotions

5,000 4,600 1,600

17% 16% 5%

5,000 4,000 2,700

10% 8% 5.40%
...