The main issue of the P&G Korea case is centered around the question of market share. P&G and Unilever are the two major market shareholders in the Korean detergent industry holding 80-85% of the total market share. The remaining 15-20% of the market is held by low-priced local Korean brands. There are no new markets either company can tap for further market share since most Korean households already use laundry detergent, making the market saturated. Other than peripheral chemical changes claimed to be “improvements”, there are no major innovations to be explored for product development or diversification. Per Ansoff’s strategic opportunities matrix, P&G and Unilever are both focused on Market Penetration, working to increase their prospective shares of the Korean detergent market.
As shown in Figure 1, P&G has had a steady increase in market share over the last several years while Unilever has been on the decline. Unilever drastically increased their advertising budget in 2006 likely in an attempt to recapture market share. The tactic worked. As shown below, it resulted in recapture of market share for Unilever, at the expense of P&G.
P&G obviously needs to take some sort of action; they cannot afford to keep losing market share to Unilever. The Korean detergent market is mature with slow growth (see Figure 2). The BCG Product Portfolio Matrix, therefore, defines the product line as a cash cow for P&G. As such, P&G wants to protect their cash cow so they can continue using the money to infuse back into their diverse product line-up and keep their stars going strong.
One possible option that P&G is considering is increasing their marketing expenditures like they have in previous years. The proposed budget for 2007 is $38 million, which is 15% higher than what they spent in 2006. Throughout P&G’s six-year lifetime in the Korean market, P&G’s yearly increase in marketing expenditure has been sporadic, ranging from a 28% increase between 2004 and 2005 and a 3% increase between 2005 and 2006 (see Figure 3). Despite the inconsistent changes in spending from year to year, P&G’s market share consistently increased between 1% and 2% every twelve months (see Figure 1). The question is, with Unilever’s actions in regards to marketing expenditures, is the 15% increase going to be enough to restart P&G’s upward growth of market share?
Another option to consider is to increase the marketing budget beyond 15% as a direct response to Unilever’s marketing expenditure increase in 2006. This increase in marketing expenditure could also lead P&G to reach the recommended 120 GRP’s in television advertising. P&G could also use this extra advertising budget to strongly increase trade sales promotions in an attempt to balance out Unilever’s greatly increased trade sales promotions from the prior year.
Both of these options are a demonstration of classic Game Theory behavior, both companies increasing expenses in an attempt to regain market share. Figure 4 shows how this action/reaction in the battle for market share works. When Unilever markedly increased their marketing expenditures in 2006, the result was a loss of market share and profit for P&G. Therefore, without knowing if Unilever is going to continue with a strong budget for marketing in 2007, P&G’s natural response is to consider also budgeting a strong increase in expenditures to hold onto current market share and profits and possibly even increasing both. Of course, the additional fixed costs of this strategy will reduce net profits.
One major issue with P&G’s choosing an option that increases the current advertising budget up to or over 15% is the trend of declining Return on Investment (ROI) with each increase in advertising expenditure (see Figure 5). The strategy of getting back market share by upping marking expenses was reasonable for Unilever since their ROI remained steady as they increased their advertising expenditures over the years. P&G outlook is a little different. As long as market share was increasing, they could ignore the declining ROI. However, now that there is a chance of only holding market share steady while ROI continues to drop, it makes less sense for P&G to try to fight fire with fire and respond with a major increase to their own marketing expenditures in 2007.
The two companies’ best chance of breaking the destructive cycle of classical Game Theory behavior is to form a cooperative relationship. Neither company has competitive advantage over the other; therefore, there is little to lose on either side. By Unilever and P&G coming to an agreement to maintain or even reduce marketing expenditures in the future, both can concentrate on strategies that aim to keep individual brand equity strong to increase use and satisfaction among current customers rather than continue fighting for market share. As Figure 6 shows, the most desirable outcome is for both to keep or even slightly increase market share while also maintaining higher net profits by not increasing fixed costs in marketing. With some of these marketing expenditure savings, the two companies may also be able to lower their retail prices to target some of the consumers of the local detergent brands, tapping into the share of the market that neither currently has.
Therefore, our final recommendation is for both Unilever and P&G to work towards a cooperative relationship. We recommend that P&G stay at the budgeted marketing expense for 2007 of a 15% increase in an attempt to equalize the damage of market share loss that occurred in 2006. If Unilever agrees to hold at their same budget from 2007 or only a modest increase rather than putting forth a new drastic increase as the previous year, then both companies can benefit. As the two companies are working on a cooperative relationship, and building trust, they can agree to a consistent long-term marketing strategy aimed at maintaining their brands and current market share. This strategy helps the two companies reach Nash equilibrium, where neither will have any incentive to deviate because they are maximizing profits at this point.
Also, Porter’s Five Forces model tells us that this new relationship will cause Unilever and P&G to have increased supplier bargaining power. This can be utilized to the advantage of both companies by giving them negotiating power with the retailers to decrease their retail margin, as outlined in the margin analysis below (Figure 7). In turn, this increases both companies’ unit contribution margin and, ultimately, profit.
In conclusion, a cooperative relationship between P&G and Unilever gives both companies an advantage, both financially and in their market share, helping the two companies reach an equilibrium with strong brand equity and supplier bargaining power. This route provides net profit maximization for all parties involved.