Ramjas College Case Study: Round 1

 Case

You are the owner of a FMCG (Fast Moving Consumer Goods) company named ‘Pleasant and Gay Ltd’ (P&G). The company manufactures products of different qualities which are targeted towards the low, middle and high income groups. The company shares the market with ‘Ugly to Lovely Ltd’ (UTL) equally. There is no other competitor in the market. Both UTL and P&G have slightly differentiated products which are sold at similar prices.
On 25th November, 2014, UTL’s new manager who was appointed in the month of January last year, Mr Pepperpots, announces a new subsidiary company of UTL. The new company ‘Look Like Fairies Ltd.’ (LLF) has been created by UTL to introduce brand differentiation in the products that serve the high-income bracket consumers. A month after the announcement was made; LLF and UTL commenced heavy advertisement. By 25th January, 2015, UTL has been able to increase its market share from 50% to 57%. The high income consumers have been attracted towards the new costly product range launched by LLF and the Veblen effect is clearly at play. Also, through strong advertising, LLF has been able to create the snowball effect to attract the consumers and this has contributed to the loss in the market share of P&G.
After two days there is a meeting to be held which will be attended by the board of directors. You have been asked to present the possible strategies to counter the step taken by UTL and increase P&G’s market share. Will you use the snob effect to your advantage? Will you use strategic pricing? Or do you have something better in your mind?
Analyse the above situation and explain your strategy in no more than 2000 words.

Solution:

By Sumit Karvade and Arjun Deshpande

BITS Pilani Hyderabad Campus

 

Assumptions used:

1.      As given in the case, the objective of the company is increasing their market share and not profit maximization

2.      Before UTL’s move of differentiation, market share of UTL and PNG was 50% for both. After differentiation as UTL’s share increased to 57%, it is assumed that the percentage increase in customers has been because LLF has drawn 7% consumers from PNG and 7% from UTL.

3.      Income of consumers remains the same

4.      Goods by UTL and PNG are perfect substitutes

Identifying market demand:

Here we can hypothesize that demand of a product is a function of price of the product & prices of substitutes:

    D_UTL = β₀ – β₁ P_UTL + β₂ P_PNG

    D_PNG = α₀ – α₁ P_PNG + α₂ P_UTL

    D_LLF = γ₀ – γ₁ P_PNG – γ₂ P_UTL + γ₃ P_LLF

Although generally quantity sold for elastic products increases with a decrease in price, we must notice that UTL has negative price elasticity with its price and positive cross price elasticity with price of PNG. Also LLF has positive price elasticity with its price and negative cross price elasticity with UTL and PNG. This means that an increase in price of LLF goods will increase its demand. In the demand function of LLF, unlike other two its price will positively affect its demand. As the price increases lesser number of people will be able to buy the product, thus making it more exclusive. Exclusivity will augment its demand as the consumers base is a high income group.

And price for the higher end segment will increase with increase in its price as it has a positive elasticity

        i.            By decreasing price PNG can take advantage of snob effect by exploiting the consumers who are interested in reasonable prices and features rather than brand value.

      ii.            By creating a subsidiary on similar lines of LLF, the maximum PNG can do is stop its customer base, who are interested in elite products from eroding further.

Solutions

There are five possible strategies:

1.      PNG reduces its price

2.      PNG keeps its price constant but launches a subsidiary which specializes in higher end products. Similar to what UTL did.

3.      PNG reduces its price in order to take advantage of snob effect i.e. attracting consumers who prefer less expensive products and creates a subsidiary similar to LLF for more expensive products.

4.      PNG keeps its pricing unaltered and creates a subsidiary which will produce cheaper products.

5.      Instead of using a single strategy to counter UTL, PNG can use combination of strategies. Keeping its pricing same along with creating two subsidiaries one for cheaper products and the other for expensive products.

For each one of the strategies taken by PNG, there can be two types of responses by UTL. One is by maintaining the status quo and not responding to the competition. And the second moves possible to each of the PNG strategies by UTL are mentioned below:

1.      In response to a decrease in price by PNG, UTL may also decrease its price of its lower end segment. This will result in price wars and competition which is unhealthy for both the firms. Whereas the LLF market will continue to grow

2.      Although with this move PNG can take some benefit of the higher end product demand which has been set rolling by LLF advertisements, but this would not be a bold move, and the best PNG can expect is not to be left far behind. UTL captures the first mover advantage here

 

Strategies 3, 4 and 5 have no obvious counter strategies. Which one of them is to be used depends on the contingencies of the situation and dynamics of the market.

Recommendations

Considering the general nature of fast moving consumer goods, strategy 5 is the best choice among those being considered.

Creating a subsidiary for lower end products (even if done with a very less profit margin) will be able to draw a new consumer base towards the company, and attract some of the thrifty consumers of already existing market. On the other end the snowball effect and Veblen effect created by LLF could be harnessed by the high end subsidiary, by selling products to a fewer customers at a higher profit margin.